Volvo Cars Outlook Deteriorating As Profit Dives

Premium sector wannabe Volvo Car’s 3rd quarter operating profit fell by about a third as competitors in Europe reported strong earnings, and Moody’s Investors Service changed its outlook for a rating change to a less favorable “stable” from “positive”.

Over the next year and a half, profitability will weaken as sales contract, Moody’s said in a report. Investment bank UBS doesn’t expect positive free cash flow until 2025.

Volvo, which owns nearly half of electric car maker Polestar and is itself majority owned by China’s Zhejiang Geely Holding Group, has reported 3^rd quarter operating profit fell to 2.1 billion Swedish crowns ($197 million) from 3.3 billion ($310 million) a year ago. Part of Volvo was floated on the stock market about a year ago.

BMW and Mercedes had warned shareholders after reporting strong profits for the period that 2023 would be challenging for their bottom lines. Volvo talked about how its sales were likely to be slightly lower in 2022, after a previous forecast they would improve, but no word on profit.

Volvo did grab some favorable headlines earlier this month when it unveiled its EX90 SUV flagship electric vehicle which will go on sale in the U.S. in 2024. The EX90 will be built at Volvo’s Ridgeville, South Carolina, factory.

Moody’s was more concerned with current difficulties.

“A rating upgrade has become unlikely over the next 12-18 months because of the more challenging automotive sector environment, a weakening profitability prompted by high raw material costs, and a sales contraction due to a delay in car deliveries as a consequence of supply chain constraints,” Moody’s analyst Matthias Heck said in the report.

Heck said Volvo benefits from moderate leverage and strong liquidity and expects medium-term profit margin improvements.

“While the macro environment in 2023 is a challenge, numerous new model launches and the gradual unwinding of the supply-chain related delayed car deliveries should provide support,” Heck said.

Volvo’s long-term targets include an improvement in profitability to an 8 to 10% EBIT (earnings before interest and tax) range by 2025 compared with an average of about 6% between 2016 and 2019. Moody’s expects some improvement but in the current environment it is likely to be “muted”.

“The expectation of margin improvement is driven by new model launches, like the EX90, efficiency measures and scale effects, especially at Polestar, as well as price increases,” according to the Moody’s report.

The EX90 competes with the Mercedes EQE, Tesla Model X and BMW iX1. Much of the EX90’s engineering is based on the recently launched Polestar 3.

Polestar reported a smaller operating loss of $196 million in the 3^rd quarter, down from a loss of $292 million a year ago.

UBS has a sell rating on Volvo and said in a report late last month most mid-decade targets will be difficult to reach.

“On volume, we are cautious about the demand destruction risk in 2023, and intensifying competition in Volvo’s core segments and regions. Further, Volvo has a small market share in a fragmented battery-electric vehicle premium market. We do not forecast positive free cash flow until 2025. The current valuation premium compared to peers is unjustified, in our view,” the report said.

After an initial spurt on the stock market after the initial float to a peak of just over 90 crowns in January, Volvo’s share price has been on a roller-coaster, mainly downward, slide close to 43 crowns in late October. It spurted to just under 60 crowns last week, before plunging down again to close Friday at 50.67 crowns.