Volvo’s result benefits from a record-strong USD
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
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
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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
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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