Adding Volvo — We believe Volvo presents the strongest European recovery story within capital goods — driven by self-help and volume recovery.
In a separate note published today (European Machinery - Give Me a New Super Cycle) we increase the target price on Volvo shares to SKr142 (from SKr109) and reiterate our Buy rating. Our 2015-16 EPS estimates increase by 28%and 16%, respectively ; leaving the new forecasts c13% and 17% above consensus. We see volumes not only supported by “macro”, but for replacement to drive FY16-17E 8% growth alone for Europe. Volvo shares sit on an 11.7x and 8.8x FY15-16E EV/EBIT, at a 20% discount to the sector.
We highlight why we continue to like Volvo:
1) cost savings are coming through and earlier price/mix issues are starting to unwind;
2) European Trucks is showing the best upwards momentum of any end-market in cap goods (we see upside to Volvo’s guide from replacement);
3) Brazil EBIT likely to improve from here with layoffs to take place from 2Q onwards;
4) little impact from indirect O&G effects;
5) NA volumes more resilient ahead of any looming downturn given increased shares of captive components that have substantially increased the aftermarket; and finally;
6) the pending CEO change. Following the recent pull-back in the share price, we take the opportunity to add Volvo to Citi Focus List Europe.