Volkswagen: Electric Vehicle Keeps The Company Resilient During A Difficult Year

Investment Thesis

Volkswagen (OTCPK:VWAGY) stands as a prominent global automotive manufacturer, renowned for its substantial size and extensive international footprint. The company’s strategic emphasis on electric vehicles (EVs) and sustainable mobility solutions positions it favorably to capitalize on the escalating global shift towards clean energy and environmental awareness. With governments worldwide advocating for more stringent emissions regulations, Volkswagen’s steadfast dedication to EVs and pioneering efforts in this domain has the potential to drive sustained growth over the long term.

Nonetheless, Volkswagen’s stock has witnessed a decline of over 30% in market value since the beginning of the year. This trading week, it reached its lowest point since April 2020, following a cautionary announcement from the German automotive behemoth. Volkswagen indicated that its operating profit for 2023 is expected to remain at the same level as the previous year. The company’s newly revised projection of an operating profit approximately equal to the EUR22.5 billion ($23.9 billion) it achieved in 2022 signifies a reduction from the projection of EUR25.1 billion ($26.6 billion) implied by the midpoint of its earlier guidance range.

Volkswagen stock ($VWAGY) reached this week its lowest point since April 2020

Despite this, my investment thesis remains Bullish on Volkswagen’s stock over the long term, the stock has an attractively low P/E ratio that currently stands below 4 and my strong belief is that Volkswagen will persist as one of the top three automobile manufacturers in the foreseeable future. Volkswagen’s position in the electric vehicle (EV) revolution is exceptionally promising which is largely attributed to the company’s strong financial standing, which provides Volkswagen with the essential resources to drive its evolution into a prominent player in the worldwide EV arena. The company holds a global leadership role in terms of EV and software investments, having allocated a massive $100 billion for this endeavor. This substantial investment is supported by its steadfast Combustion-engine vehicle (CEV) business.

Volkswagen reported Q3 results

On October 26, 2023, Volkswagen disclosed its third-quarter financial performance, revealing that the German automotive company’s after-tax profit for Q3 stood at 4.35 billion euros ($4.60 billion), exceeding the 2.135 billion euros ($2.01 billion) earned during the same period last year. This comes in spite of a 2.8% production drop to 2.17 million vehicles, primarily due to the impact of floods at its Slovenia facility and rising supplier costs.

This production drop might also suggest a weakening demand for Volkswagen’s products, but the company successfully boosted its sales volumes and revenues, despite these obstacles. For the third quarter, the company reported sales was 78.84 billion euros ($83.56 billion) compared to 70.67 billion euros ($74.91 billion) a year ago. In the third quarter, Volkswagen saw a 3.5% increase in sales to 2.31 million cars, with deliveries surging by 7.4%.

However, even with the rise in sales volumes and revenues, Volkswagen’s CFO, Arno Antlitz, expressed disappointment that the company fell short of its ambitious profitability targets for Q3. Arno Antlitz, CFO & COO of Volkswagen Group:

“Overall, we are on a robust course and have again increased sales volumes and revenues in the third quarter. However, we cannot be satisfied with our profitability, which in the third quarter fell short of our ambitious targets. We are now concentrating on the systemic implementation of the 10-point plan and our cross-brand performance programs.” Source.

Nevertheless, investors should keep in mind that Volkswagen Group delivered solid results in a challenging environment where disruptions in production and higher product costs impacted the company’s operation on every level. For the nine months, total company sales reached 235.10 billion euros compared to 202.89 million a year ago which represents revenue growth of 16 percent. Net income for the nine months was 11.77 billion euros compared to 12.70 billion a year ago and despite this drop, this still represents a very good financial result.

Year-on-year, there has been an 11 percent rise in total deliveries, reaching 6.7 million vehicles. The net cash flow for the first nine months stood at 4.9 billion euros, with 2.5 billion euros generated in the third quarter alone. This figure remained nearly unchanged from the previous year, even in the face of logistical bottlenecks. The electrification plan is advancing, as deliveries of battery electric vehicles (BEVs) surged by 45 percent, totaling 531,500 vehicles in the first nine months. The BEV’s proportion of total deliveries also expanded to 7.9 percent during this period.

Financial outlook for fiscal 2023 updated

On October 20, 2023, Volkswagen revised its projections for the fiscal year 2023. The company maintains its expectation that customer deliveries will fall within the range of 9 to 9.5 million vehicles. Additionally, Volkswagen still anticipates that Group sales revenue will be 10 to 15 percent higher than the previous year’s figure. The evolution of commodity markets remains highly uncertain and regarding the impact of fair value remeasurement of hedging transactions outside hedge accounting on the operating result, the company no longer foresees the ability to offset the negative effects amounting to EUR -2.5 billion recorded in the first nine months by year-end, based on the current perspective.

Consequently, the company’s revised expectation is that the full-year 2023 operating result will be approximately at the same level as the preceding year, excluding special items, which was around 22.5 billion euros (previously forecasted as an operating return on sales between 7.5 and 8.5 percent). This outlook accounts for the accumulated effects of the fair value remeasurement of hedging instruments during the first nine months of the year. Encouragingly, Volkswagen still foresees a substantial to robust year-over-year rise in the net cash flow of the Automotive Division. The net liquidity within the Automotive Division is projected to be within the range of 35 billion euros ($37.10 billion) to 40 billion euros ($42.40 billion).

Volkswagen’s New Energy and Intelligent Development Plan

Volkswagen Group has set its plan for carbon neutrality by 2050. They aim to invest 180 billion euros between 2023 and 2027, with 68% of the investment allocated to future areas related to digitization and electrification.

The four key technological platforms are architecture, batteries and charging, software, and mobility. The architecture, specifically the Modular Transverse Toolkit (MQB) since 2012, has been a cornerstone, and they have transitioned to the Modular Electric Drive Matrix (MEB) for the electric era. Since 2020, over 1.1 million electric vehicles have been produced on the MEB platform. And the enhanced platform will further improve range and efficiency by approximately 10%.

Considering the importance of the Chinese market, the Volkswagen Group is further expanding its presence in China. In 2023, they announced a strategic partnership with XPeng ($XPEV), where Volkswagen Group will acquire a 4.99% stake for 710 million USD. The transaction is expected to be completed in the fourth quarter of 2023. Concurrently, Volkswagen and XPeng have entered into a technology framework collaboration to jointly develop electric vehicles in China.

Valuation

Despite some concerns, Volkswagen presents a compelling prospect for long-term investors. The company boasts a robust financial position and the capability to navigate cost pressures better than its smaller counterparts, particularly in the face of ongoing supply chain challenges plaguing the automotive industry. Volkswagen stands out with notably higher profitability when compared to many other automakers, and its shares carry an attractive P/E ratio that currently stands below 4, whereas the industry’s average P/E exceeds 7. It’s essential for investors to take note of Volkswagen’s low P/B ratio of 0.29 (reflecting the market value against its book value), which is a cost-effective option compared to the industry’s average P/B of 1.6. With a current dividend yield exceeding 8%, all these metrics point towards the stock being undervalued at its current price, making it a promising opportunity for long-term investors.

Risk Factors

Although Volkswagen offers an appealing investment prospect, it is important to take into account various risk factors. To begin, there is the possibility of heightened competition in the electric vehicle (EV) sector, with other car manufacturers vying for a larger market share. Furthermore, the persisting supply chain disruptions and semiconductor shortages could continue to disrupt production and impede Volkswagen’s capacity to fulfill increasing demand. Moreover, alterations in regulations and shifts in consumer preferences might present hurdles to Volkswagen’s sustained growth and profitability over the long term. It is imperative for investors to remain vigilant regarding these risks and assess Volkswagen’s adeptness in managing them effectively.

Conclusion

Volkswagen’s strategic shift toward electric vehicles establishes the company as a strong player in the swiftly expanding EV sector. Through significant investments in EV technology and a robust presence in crucial markets, Volkswagen is excellently poised to take advantage of the rising demand for electric vehicles. While there may be short-term supply chain obstacles, Volkswagen’s enduring performance, appealing valuation, and potential for future expansion render it an attractive choice for investors looking to participate in the changing automotive industry.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.