Investment conclusion: Despite continued caution on
the truck cycle, clear indications from channel checks
that pricing remains more disciplined than feared means
our valuation must reflect a less extreme view of the
cycle. We therefore move our price targets to our base
case (from mid-way between base and bear previously).
With ~30% downside to our Volvo price target, it remains
our highest conviction Truck Underweight. We continue
to believe that Volvo’s earnings and balance sheet can
deteriorate faster than its peers and with the stock
already trading close to mid-cycle levels, we struggle to
see how it can outperform from here. Against this we
position MAN as our favourite European truck stock.
What’s New: Volume the main variable, not pricing.
Recent channel checks suggest our worst fears on price
competition in Europe have not been realised. While
discounting is happening, it is not as pervasive or deep
as we initially feared. Of the six different customers we
spoke with, larger fleets (>1,000 trucks) suggested that
discounts being offered were still moderate, no more
than 2-3%. Some of the smaller owner-operators and
fleets say they have been able to source better deals,
but discounts have remained moderate compared with
previous downturns, no more than 10-15%. Combined
with significant production cuts and focus on inventory
reduction, we are now satisfied that our worst case 2009
pricing assumptions are failing to materialise.
Normalised valuation suggests market looking
through near-term pain. The sector trades on ~10x
normalised P/E vs. LT average of ~13x. Appropriate
perhaps as we are still two years from normalized, in our
view. MAN looks marginally more attractive at 9x
normalised P/E versus Volvo at 10x and Scania at 11x.