September 1, 2017 / 12:26 PM / 2 years ago

Volvo shares jump on truck maker's new margin target

STOCKHOLM (Reuters) - Shares in truck maker Volvo (VOLVb.ST) jumped more than 7 percent on Friday after the Swedish firm targeted the highest level of profitability since the sale of its car making arm to Ford (F.N) nearly two decades ago.

The logo of Swedish truck maker Volvo is pictured at the IAA truck show in Hanover, September 22, 2016. REUTERS/Fabian Bimmer

Volvo, which competes with Germany’s Daimler (DAIGn.DE) and Volkswagen (VOWG_p.DE), said late on Thursday that it will target an average operating margin above 10 percent over a business cycle.

The company has gone through years of restructuring and heavy cost cuts, which have led to a clear profitability boost over the past year.

Its double-digit margin target compares with an analysts’ forecast for an operating margin of 9.7 percent in 2019, according to Thomson Reuters SmartEstimate.

“We are still in a strong part of the trucks cycle, which means that we should see further improvements from current levels,” Handelsbanken Capital Market analyst Hampus Engellau said.

“And if the group is still not on the average today, the market concludes that we could have 1-2 years of continued structural improvements, reaching double-digit margins, possibly up towards 11-12 percent.”

Shares in Volvo rose as much as 7.6 percent and were up 7.2 percent by 1215 GMT, taking their year-to-date gain to 37 percent as investors have been impressed by strong orders and improving margins.

Volvo said in a statement after the market close on Thursday it was now “in a phase where focus is on organic growth and improved profitability through continuous improvement and innovation.”

The company’s adjusted operating margin in the first half of this year was 9.4 percent, it said in July, up from 7 percent a year earlier.

Over the past 10 years, excluding a loss-making 2009 in the wake of the financial crisis, it has averaged an annual operating margin of around 6 percent.

Volvo previously had a profitability target where its different businesses, which include construction equipment and buses, were benchmarked annually against competitors.

“A clear and straightforward operating margin target supports the efforts to drive performance across the group,” Volvo said in its statement.

Danske Bank said the new targets were “very bullish” and likely to boost consensus earnings estimates as well as dividend estimates.

Reporting by Johannes Hellstrom; Editing by Niklas Pollard and Susan Fenton

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