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Volvo Shares Drop on Lower-than-Expected Earnings

World number-two truck maker Volvo posted a smaller-than-expected rise in fourth-quarter pretax profit on Wednesday, hitting its shares, but said it still saw firm growth in its key European market.

AP

Pretax earnings rose to 5.61 billion Swedish crowns ($885 million) from 5.23 billion a year ago, falling short of a mean forecast of 6.08 billion in a Reuters poll of 16 analysts.

The outcome was marred by a provision of 370 million crowns for engine-related warranty expenses in North America, an item which was not included in the poll.

"The underlying profitability remained at a favourable level, which is a reflection of the positive development in most of our markets," Volvo said in a statement.

The group said robust markets had helped it command strong prices for its vehicles, but raising production in its European business had resulted in higher manufacturing costs while expenses for research and development also rose.

Volvo shares, which have shed nearly 30 percent over the past three months, were down 2.9 percent versus a flat broader market. Shares in domestic rival Scania, which is due to issue its earnings report later on Wednesday, closed 0.6 percent lower.

"Volvo's (stock is) cheap, and it's got a fantastic dividend, but it's not free of negative issues at the moment and I think those issues could continue to weigh on the stock," Goldman Sachs analyst James Moore said.

"Despite the better demand ... the EBIT was worse than expected and there continues to be a cost issue at Volvo."

Truck makers have enjoyed strong demand in Europe in recent years, mainly powered by a growing appetite for new and used heavy-duty vehicles in eastern Europe -- leaving manufacturers struggling to expand capacity.

While a bleaker economic outlook has prompted some analysts to predict a slowdown in Europe, Volvo stood by its forecast of 5 to 10 percent growth in the European truck market.

"With the different investments that we are making as we look at 2008, we think that we will be able to grow with the market there," Volvo CEO Leif Johansson told a news conference.

U.S. Woes

Across the Atlantic, Volvo is contending with the opposite situation. U.S. heavy-duty truck sales plunged at the start of last year as a buying spree ahead of new emission rules for truck engines came to a juddering halt.

Since then, the fallout from the U.S. mortgage crisis has cast a widening shadow over growth prospects.

In its first stab at forecasting North American truck demand this year, Volvo said it saw the market coming in at about the same level as in 2007 with a rebound seen at the end of 2008.

"I think we are at the bottom of the North American market," Johansson said.

"The reason I say that is that we are so far below historic trend lines and transport work in the U.S. is continuing, you know. So I think toward the end of the year we should be able to see a come-back in the North American truck market."

Orders of trucks, which Volvo sells under the Renault, Mack and Nissan Diesel brands as well as its own name, rose 23 percent year-on-year in the fourth quarter -- down 8 percent in Europe and up 13 percent in North America from a low comparison.

"The total European market is currently limited by the production capacity of the industry," the firm said. "The strained production in Europe affects the supply of trucks also on markets in Asia, the Middle East and South America."

Revenue at the group, which also sells buses, construction equipment and a broad range of engines, rose to 84.56 billion crowns from a year-ago 67.63 billion, easily beating the 77.71 billion seen in the Reuters poll of analysts.

Volvo said it would pay a dividend of 5.50 crowns per share against 5.0 crowns a year ago and an expected 5.26 crowns.

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