Volvo's third-quarter earnings surprise needs to be kept in context. It was a good day for the Swedish truck maker's shares. They rose as much as 10 per cent in morning trade. But Volvo suffers from poor profit margins, sluggish demand in key markets and fierce competition.
Volvo may actually face more headwinds than previously thought. In Europe the hopes of economic recovery are sluggish. Demand in South America is shrinking, while Volvo expects the Chinese market to stagnate. The only bright spot is North America, where the group's order intakes are up strongly.
Profit is being bolstered by cost-cutting and there may be more gains made. Having kicked off the programme a year ago, Chief Executive Olof Persson now says he wants to squeeze the annual cost base by 10 billion crowns, up from 6.5 billion crowns, by 2016.
So far, the efficiency programme seems to be on track. In the last year, Volvo has reduced operating expenditure by 2.4 billion crowns. But almost two-thirds of the progress so far comes from the research and development budget which has been squeezed by nine per cent compared to 2012. Investments in property, plant and equipment dropped by 33 per cent in the third quarter compared to a year earlier.
The approach has brought rapid results. But having taken the quick wins, it may be harder for Volvo to find additional savings. Skimping on R&D and investment in capital expenditure also brings risks. Volvo can point to the fact that it only revamped its model range in 2013. Given industry's long product cycles, this does reduce the need for big spending for now. But it may undermine Volvo's long-term competitive position.
Investors, though cheered on October 24, have shown doubts by marking the stock down by around a quarter in the previous six months. Even so, shares trade at the equivalent of 14 times forward earnings, a 15-per cent premium to peers in the European machinery and equipment sector. It is hard to see value.
Volvo may actually face more headwinds than previously thought. In Europe the hopes of economic recovery are sluggish. Demand in South America is shrinking, while Volvo expects the Chinese market to stagnate. The only bright spot is North America, where the group's order intakes are up strongly.
Profit is being bolstered by cost-cutting and there may be more gains made. Having kicked off the programme a year ago, Chief Executive Olof Persson now says he wants to squeeze the annual cost base by 10 billion crowns, up from 6.5 billion crowns, by 2016.
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The approach has brought rapid results. But having taken the quick wins, it may be harder for Volvo to find additional savings. Skimping on R&D and investment in capital expenditure also brings risks. Volvo can point to the fact that it only revamped its model range in 2013. Given industry's long product cycles, this does reduce the need for big spending for now. But it may undermine Volvo's long-term competitive position.
Investors, though cheered on October 24, have shown doubts by marking the stock down by around a quarter in the previous six months. Even so, shares trade at the equivalent of 14 times forward earnings, a 15-per cent premium to peers in the European machinery and equipment sector. It is hard to see value.