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Electric vehicle buyers fret about range. Investors in Volvo Cars have similar worries about the staying power of the carmaker’s new strategy.
The company has promised to end production of internal combustion cars by 2030. Sales of battery-powered cars and SUVs are growing at double-digit rates. Yet its share price trails European competitors and EV specialists. Since it listed, its market value has dropped by over a third.
There are good reasons for this. The company, which is majority-owned by China’s Geely, may not meet its targets. Although EV sales have grown 27 per cent over two years, not all of that expansion is profitable. Polestar, Volvo’s upmarket EV brand, loses money. Volvo owns a 48 per cent share of Polestar. Its losses, plus those of other associates, weigh on group operating earnings. Polestar will not go into the black until 2025, according to analysts’ estimates on Visible Alpha.
Time and money are required from Volvo. In mid-November, a week after the carmaker’s third-quarter earnings, it announced it would extend its financing to Polestar by another $200mn, plus up to $1.3bn via external debt and equity raising. That sounds like an overhang on the shares. Meanwhile, Volvo’s free float is a mere 18 per cent.
There is little profit growth elsewhere either. By 2024, group operating profits, including joint-ventures and associates, will have walked sideways over three years. No wonder the company’s enterprise value is a mere 4 times operating earnings. It is one of the cheapest carmakers in Europe.
Shares trade at roughly SKr33. But put Volvo Cars on a market norm multiple of 5.5 times next year’s core operating earnings, tack on Polestar at one time 2024 revenues plus other associates, joint ventures and net cash and it could be worth more than SKr56 per share, thinks Bernstein.
As long as the market doubts Volvo’s execution the share price will only move downhill. The cheap valuation will only suit the most patient investor.
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