Analysts are forecasting double-digit growth for this turnaround auto company in the next five years.
Volkswagen Aktiengesellschaft (VLKAY)
From The Turnaround Letter
Volkswagen Aktiengesellschaft (VLKAY), based in Germany, is the world’s largest car maker, producing 10.4 million units last year. Its iconic brands, including Volkswagen, Audi, Porsche, Lamborghini, Seat, Scania and Bentley, serve nearly every consumer segment.
A truly global company, with 2016 revenues of more than €217 billion, nearly 60% of its vehicle deliveries were to markets outside of Europe. Last year, all ten of its major segments were profitable.
All was well with Volkswagen until September 2015 when it was caught cheating on emissions tests for 11 million diesel cars. Its share price quickly fell 50% and currently remains nearly 40% below the pre-scandal level. Investors are concerned that the debacle will taint the brand and require large payouts for fines and settlements. Volkswagen has already agreed to pay nearly $25 billion, with potentially several billion dollars more ahead.
Also, it has promised regulators to invest in electric cars and charging stations, a capital-intensive plan with uncertain economics. In addition, VW faces a range of challenges including aggressive competition, labor inflexibility and a heavy reliance on profits in China. Investors further worry about the risk of a downturn in demand from the currently strong auto cycle.
After a period of finger-pointing, Volkswagen is now focusing on improving its business. The CEO as well as the head of VW America were replaced by new leadership. The company has cooperated with investigators and continues to settle claims. New management has developed a reasonable plan to -increase profit margins and reduce the company’s capital intensity while maintaining a steady new product cadence. Potential improvements in its governance could further boost shareholder value.
Despite the scandal, the brands appear largely undamaged, and business is growing. Last year, unit sales increased by 3.8% to a new record. Revenues increased by 1.9% and operating profits before charges grew 14%. As much as half of revenues come from emerging markets where long-term economic growth is likely to be strong, and its vehicles command premium prices.
The company remains financially healthy as it is funding its legal settlements from its €37 billion cash hoard. Corporate debt (not including its financial arm borrowings) is reasonable. Recently, the company reported unexpectedly good preliminary first quarter profits of €4.4 billion, up 29% from a year ago, driven by better expense control and solid demand for its newer models.
Volkswagen appears to be on the road to recovery. The shares trade at only 7.1x expected 2017 earnings.
Investors have several different Volkswagen stocks to choose from. Two stocks trade in Germany under the symbols VOW and VOW3. Although the VOW3 is called a “preferred stock,” it is essentially a common stock without voting rights and pays a slightly higher dividend than the VOW. U.S. investors may find it easier to buy the ADRs (American Depository Receipts) VLKAY (which is equal to 1/5 share of VOW) or VLKPY (equal to 1/5 share of VOW3). All four of these stocks seem to track each other pretty closely, and they all appear to have sufficient trading liquidity for most investors.
We recommend the PURCHASE of shares of VLKAY shares up to 49.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, May 2017