Volkswagen: Capacity For Upside Based On Encouraging ID. Model Performance (VWAGY)

Investment Thesis

I take the view that Volkswagen AG has the capacity for an upside to $18 based on strong growth in demand across the company’s electric vehicle offerings.

In a previous article back in June 2022, I made the argument that Volkswagen AG (OTCPK:VWAGY) has the capacity for upside going forward, on the basis of a growing inventory ratio and strong quick ratio performance.

Since then, the stock has descended to a price of $14.52 at the time of writing:

The purpose of this article is to assess whether Volkswagen AG has the ability to see a rebound in growth from here, taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Volkswagen AG as released on March 13, 2024, we can see that vehicle sales were up by 10.4% and earnings after tax were up by 13.1%.

I had previously commended Volkswagen on increasing its inventory turnover ratio – indicating that the company is selling its inventory at a faster pace in spite of supply chain issues and inflationary pressures.

With that being said, we see that while we saw growth in the ratio up to mid-2021, inventory turnover has since plateaued:

When looking at Volkswagen’s balance sheet, we can see that the ratio of long-term debt to EBITDA has fallen and remains below 1 – which is encouraging as it signals that the company has been able to pay off its debts while still financing earnings growth.

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Source: Figures sourced from Volkswagen 2023 Annual Report. Long-term debt to EBITDA ratio calculated by author.

While short-term debt has increased from over €82 million in 2022 to over €112 million in 2023, this reflects that the company is now paying off its longer-term debt loads over a shorter period, and I take the view that while long-term debt continues to fall and earnings continue to see an increase – then the company should be in a good position to fund further growth in sales and earnings.

Additionally, we see that Volkswagen has also seen significant growth in cash flow over the past year:

From this standpoint, I take the view that performance over the last year has been encouraging as a whole – in spite of the decline that we have seen in the stock.

My Perspective And Looking Forward

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, while performance for Volkswagen was impressive in the past year, the outlook for 2024 is more subdued. Specifically, Volkswagen is expecting deliveries to grow by 3% as compared to last year, citing dampening consumer demand as a result of persistently high inflation.

In terms of valuation, here is a range for the P/E ratio, EPS, and stock price since September 2020:

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Source: Author’s calculations. P/E ratio and EPS figures sourced from YCharts. Historical prices sourced from Nasdaq.

Here is a visual of both the P/E ratio and EPS over the past five years:

When looking at the above table, we can see that the current P/E ratio of 5.047x is lower than the median of 6.0245x over the given period. In this regard, I take the view that if the stock were to tend back towards the median P/E ratio of 6.0245x and earnings per share were to remain at the current level of $2.980, then $17.95 would represent fair value for the stock at this time (6.0245/2.980) – as compared to the current price of $14.52.

I had previously pointed out that a potential risk for Volkswagen is that electric vehicle demand comes in lower than expected and the company is not able to keep up with competition from Tesla (TSLA).

However, 2023 marked significant progress in the electric vehicle space for Volkswagen, with the debut of the all-electric ID.7 saloon, and the market debut of the new Tiguan. The company produced 8,592 units of the ID.7 model along with an additional 28,611 units of the Tiguan, with the same being the most-produced model at 633,147 units for 2023.

This contributed to a growth of 16.3% in vehicle sales as compared to the previous year.

While the company is expecting lower growth this year in anticipation of lower consumer demand – I take the view that the company could still have the capacity to see growth in excess of the forecasted 3% if we see the appetite for electric vehicle demand continues to grow this year. Volkswagen is set to introduce the all-electric ID.7 Tourer to the market in 2024, with the T-Cross and Tiguan models also set to receive product upgrades.

From this standpoint, I will be monitoring upcoming quarters to see if vehicle sales have the capacity to see deliveries in excess of 3% for this year. If the reception for Volkswagen’s newer electric models fares better than expected – then this could mean that the stock has the capacity to see its upside back to just under the $18 mark as calculated in the valuation above.

Risks

In terms of the potential risks to Volkswagen AG at this time, the main one is that consumer demand is indeed lower than that seen last year – and higher prices ultimately see a drop in deliveries.

For instance, we have seen that Volkswagen has had to reduce the prices of several of its ID. models across various European markets to maintain market share. If price competition becomes particularly intense, then this could significantly affect profitability across Volkswagen’s electric vehicle segment, and we could see a fall in sales revenue as a result.

Conclusion

To conclude, Volkswagen AG has seen encouraging performance in 2023, with more moderate growth expected for 2024. However, I take the view that if we see continued demand across the electric vehicle segment – sales may have the capacity to come in better than expected. Should this prove to be the case, then the stock has the capacity for further upside. For this reason, I take a bullish view of Volkswagen Group.

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.