Truck market outlook increasingly mixed, initiating coverage with a cautious view
* Cautious sector view – prefer Volvo (OP) to CNH (UP): We initiate coverage of European truck OEMs and suppliers with a cautious view. Developed markets are near or past the peak, while the risk for developing markets is still to the downside. Cyclical drivers in Europe are likely to remain supportive near term, but sustainability of the current upcycle is a concern. We like self-help in this environment and initiate on Volvo with an Outperform rating and CNH with an Underperform
* Europe positive near term, sustainability uncertain (2016E +7.6%): Near-term momentum remains solid, though we think growth is unlikely to surprise to the upside in 2016. The current cycle is supported by strong retail goods demand and business confidence. However, the cycle (ex-Euro 6 effects) has been unusually lengthy, and the structural problems of the market increase the downside risk once it ends. We believe it is too early to make a more negative call on Europe
* Key downside risk is the NA market (2016E -22%): A declining market in 2016 is well understood as orders have declined for 10 consecutive months. However, the magnitude could surprise to the downside – cyclical transportation demand indicators deteriorated sharply into year-end, with tonnage and truckload pricing both weakest since 2013, and the business inventory-to-sales ratio at 2009 levels. Carriers have already increased cancellations, and 2016 capex could be hurt by declining freight expenditure
* Self-help key for relative Outperform: Among OEMs, we prefer Volvo (Outperform, TP SEK 100) to CNH (Underperform, €TP 5.4), as we think it is on course to deliver on its SEK 10bn savings target with potential for upside surprise. For Daimler (Neutral, new TP €76 from €78), we see earnings downside risk on overly optimistic truck expectations. Within suppliers, cyclical risks outweigh valuation upside; we are Neutral on both SAF Holland (TP €10.8) and Deutz (TP €3.1). We remain Underperform on VW with a new TP of €85 (from €83).