Volvo to Trump Scania, MAN as East Europe Sales Soar

Business Materials 2 November 2007 05:35 (UTC +04:00)

Eugene Shakalida, co-owner of a logistics company in Moscow, plans to almost triple his fleet of trucks over the next four years to ship more Russian steel pipes, wood and industrial glass to customers across Europe.

The construction boom in eastern Europe that's boosting Shakalida's business also represents a jackpot for Volvo AB, the world's second-biggest truckmaker, and European rivals Scania AB and MAN AG. With share prices down 19 percent since July and signs that a North American sales slump is bottoming out, Volvo's stock may be poised for the biggest gains among the three as it predicts eastern Europe truck demand will double by 2010.

``They will enjoy very strong growth from eastern Europe and Russia for a long time,'' Christer Gardell, managing director of Cevian Capital AB, which controls 4.6 percent of Volvo's voting rights, said of the truckmakers. ``We are going to be there for a long time as a Volvo investor.''

Volvo shares, which have underperformed MAN by more than 40 percent this year, may rise as much as 37 percent in the next 12 months, according to Fredric Stahl, an analyst at UBS AG in London. In comparison, Munich-based MAN, already trading at record levels, may gain about 14 percent and Soedertaelje-based Scania may climb 15 percent, according to Stahl.

While Volvo's sales have fallen in North America, contributing to three straight quarters of shrinking profit, the Gothenburg, Sweden-based truckmaker boosted nine-month sales 67 percent in eastern Europe to 18.2 billion kronor ($2.87 billion).

``Volvo has actually handled this downturn quite well,'' said Henrik Breum, an analyst with Danske Equities in Copenhagen, who raised his Volvo rating to ``accumulate'' from ``hold'' after the company announced third-quarter earnings last week. ``They have been able to offset the negative trend in North America.''

Shakalida's company, Trasko, is indicative of surging need for transport in eastern Europe as demand for consumer goods increases and Western companies set up shop to take advantage of cheaper labor. When Shakalida joined 10 years ago, the company, at the end of a muddy road on the outskirts of the Russian capital, had 13 workers and five trucks. Today it employs 300 people and operates 64 trucks.

Transporters such as Trasko have shifted away from Russian truck brands including KamAZ, MAZ and Ural in part because their customers are increasingly demanding cargo at a specific time and Western trucks are more reliable, Shakalida said. Of the 64 trucks in his fleet, 59 are from Scania.

``My customers have very strict delivery times,'' he said. ``Russian truckmakers are out of the competition.''

Volvo forecasts the eastern European truck market will double by the end of 2010 to 160,000 vehicles a year as the region's economy grows. The market may expand to 240,000 before reaching maturity, according to Volvo. Western European sales last year rose 3.9 percent to 262,468 heavy trucks.

The Russian market for Western-brand heavy trucks expanded to 9,072 vehicles in 2006 from 1,278 in 2001, according to Scania, which forecasts the market will double this year.

``We underestimated their ability, and I think I am in good company,'' Volvo Chief Executive Officer Leif Johansson said of the eastern European and Russian markets in an interview in June. ``It's surprising we didn't see it earlier.''

Truck sales in the region are gaining as economic expansion drives up demand for consumer goods. Russia forecasts its economy will grow 7.3 percent this year, and Poland's growth is likely to reach 6.5 percent, according to the European Union.

The boom has left truckmakers scrambling to squeeze as many trucks as they can out of their factories while building new plants to catch up. MAN, Europe's third-largest truckmaker, is the first Western company to begin producing heavy trucks in the region, having opened a Polish plant in October. Volvo and Scania, the largest Western brand in Russia by sales, have announced plans for Russian plants.

``Based on the size of the economy in eastern Europe, we believe that the market is short of up to 500,000 trucks,'' Stahl of UBS said. ``The high demand level we are seeing now is likely to last for a number of years.''

Volvo may also be about to recover from a North American sales slump that has contributed to the 19 percent decline in its share price since July 16. The company's sales in the region dropped 36 percent in the first nine months of this year to 36 billion kronor after new emission standards effective from Jan. 1 made trucks more expensive. North America accounted for 19 percent of Volvo's revenue in the period.

The company's shares have underperformed those of MAN and Scania, which haven't been affected by the North American slowdown as neither sells trucks in the region. MAN's shares surged to a record closing price yesterday after the German truckmaker raised its full-year sales and profit forecasts on booming sales in Russia and Poland. Scania's net income has increased for eight straight quarters.

Volvo's truck orders in North America, an indicator of future sales, rose 7 percent in the third quarter after dropping 71 percent in the first half, the company said last week.

``The U.S. heavy-truck market has been poor this year, but we believe it is going to recover next year,'' said Kenneth Toll, an analyst with Kaupthing in Stockholm, who has a ``buy'' rating on Volvo.

The number of short positions on Volvo's American depositary receipts traded on the New York Stock Exchange fell to 945,997, the lowest in nine months, as of Oct. 15, from 1.04 million as of Sept. 28, according to data compiled by Bloomberg. A decrease suggests short sellers believe the stock will rise.

Volvo is still vulnerable to the weakening U.S. economy and shrinking truck sales in Japan. Alexis Albert, an analyst with Paris-based Ixis Securities, said he remains concerned about Volvo's integration of Ingersoll-Rand Co.'s road building- equipment unit in the U.S. and Nissan Diesel in Japan.

``At the current price, we are maintaining our negative stance on the stock as many uncertainties remain,'' said Albert, who has a ``reduce'' rating on Volvo.

Trasko's Shakalida is also cautious, recalling Russia's economic collapse in 1998, when the government defaulted on domestic debt and the ruble plunged. He outsources 70 percent of Trasko's transport, allowing the company to keep fleet investment low and avoid trucks standing idle in the event business slows down. ``We are cutting the risks this way,'' Shakalida said.

Still, if truck drivers are an indication, Western brands will continue to gain in the region.

``We live in our trucks, so comfort is very important, as well as the car's riding qualities,'' Oleg Leonov, 38, said while taking a rest in his Scania truck along a Moscow highway. Leonov, who switched to Scania about six years ago from KamAZ, said he'll ``never go back'' to a locally built truck. ( Bloomberg )