Investors in cyclical stocks are a jittery lot. After all, the idea is to get out with your winnings before everyone else spots the beginning of the end of the cycle. Investors holding Swedish truck and machinery maker Volvo
While reported revenue climbed 15% for the final quarter of the year, growth on a constant currency basis was closer to 5%. What's worse, profitability slumped from the year-ago period, as the company saw operating income fall 9% and net income fall 15%.
Trucks are far and away Volvo's biggest business, accounting for more operating income than all the other units combined. Sales here were up just 1%, and operating income was down 17%, with management blaming the profit drop on costs related to new product launches and production start-ups. But with bookings up only 4% in the quarter, I'm sure a lot of investors will worry whether or not new truck demand has already started to evaporate ahead of new emission standards later this year.
Other businesses, like construction equipment and aerospace, were far stronger. Construction sales were up 17% in constant currency, while aerospace revenues climbed 7%. In both cases, Volvo saw strong operating income performance relative to the prior year.
Volvo already seems to be hunkering down ahead of the expected downturn in truck sales in 2007. Among other things, the company has been working to integrate the production of the Volvo, Renault, and Mack-brand trucks and reduce costs and redundancies. For instance, its Powertrain business is moving from 18 engine families to two -- a step that should boost efficiency.
The question, though, is really more about how bad the downturn is going to be in heavy trucks. I'm sure that's a question that investors in American companies such as Paccar
Though Volvo pays an attractive dividend and seems to be making the right moves to minimize the damage in the downward portion of the cycle, the stock doesn't really thrill me. If I had to hunker down with a major truck play, I'd probably be thinking more of Paccar or Cummins than Volvo.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).