Investment Idea

Volvo’s result benefits from a record-strong USD

Carlsquare Vontobel.jpg
27/09/2022 | 2 min read

The USD has been strong for the past year, and this weekend it rose exponentially. This is benefitting export company Volvo, whose stock has performed weakly.

The dams have burst on the US dollar, soaring above its previous levels. A rising USD is a signal of extreme risk aversion in the market. Putin's decision to call up Russian reservists for the war in Ukraine, as well as the fact that both the US manufacturing and services Purchasing Managers’ Index  PMIs rose in August compared to the previous reading, both likely contributed to the stronger USD.

Signals are coming from both the Bank of Japan and China's central bank that they are entering the markets to protect their currencies, but this is unlikely to have more than a temporary impact until the Fed and ECB also join in, which still seems distant. For ECB and Fed to intervene, it would take, for example, an acute crisis in Italy that could affect the whole EU.

USD/SEK, a daily one-year price chart

Source: Infront.

Regarding the Nordics, the Stockholm Stock Exchange has been very weak, not least considering that share prices are quoted in a weak SEK. The OMX30 includes many cyclical industrial companies that often benefit from a weak SEK and a strong USD/SEK and USD/EUR. However, it is Ericsson and Volvo that have by far the largest net exports from Swedish factories, which makes their devaluation gains more significant. We chose Volvo because the company delivered a relatively strong Q2 2022 result, with both order intake and profits landing above the market’s expectations. In addition, the upcoming electrification of the vehicle fleet (driven by environmental requirements) could likely drive strong demand for Volvo's new truck models for years ahead.

The 25 per cent strengthening of the currency pair USD/SEK since 31 December 2021 corresponds to around SEK 2.5 billion in improved earnings for the Volvo Group. A further SEK 0.3 billion in earnings could be added as the Euro has strengthened by about 6 per cent in 2022. This means about SEK 2.8 billion in improved operating profit in the Volvo Group due to a stronger USD and EUR. This corresponds to an earnings lift of 6 to 7 per cent for the Volvo Group linked to this currency effect compared to corporate earnings last 12 months.

VOLVO B (in SEK), a daily one-year share price chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The Volvo share is trading at Price/Earnings (P/E) 10 times the earnings of the last twelve months. Measured on the 2022 consensus forecast, the valuation falls to a P/E of eight to nine times.

The stock has fallen quite a bit recently in the general stock market downturn but is now close to a long-term weak rising support line from SEK 155 on July 5th to now SEK 159.

VOLVO B (in SEK), a weekly five-year share price chart

Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence


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