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Volkswagen: Becoming Attractive, Be Patient

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Volkswagen mill successful Tennessee

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Volkswagen overview:

Volkswagen AG (OTCPK:VWAGY) (OTCPK:VLKAF) (OTCPK:VWAPY) is simply a starring automobile institution pinch a world presence, pinch important operations successful nan pursuing regions: Europe, North America, South America, and nan Asia-Pacific region.

https://www.volkswagenag.com/en/group.html#

Volkswagen Brands (Volkswagen)

Volkswagen has gone done immoderate important events successful caller years. In 2015, nan institution was implicated successful a conveyance emissions scandal, resulting successful billions of euros successful fines, which person only been afloat resolved successful nan past 3 years.

Volkswagen has precocious spun disconnected its luxury conveyance marque Porsche, which it was mixed pinch complete a decade agone pursuing nan famed short squeeze. Further, they person collaborated pinch Rimac to abstracted Bugatti into a abstracted business, which will beryllium controlled by Rimac and Porsche.

This has each been portion of an effort by Volkswagen to position itself for the early to come, importantly to free up nan resources it will need. The business has an incredibly ample finance to make, that is to revolutionize its existent fleet for nan electrical conveyance future. The starring EV business successful nan west, Tesla (TSLA), announced grounds deliveries successful Q4'22, which leaves Volkswagen leagues behind.

Markets person rewarded this first movers' advantage, pinch Tesla's banal outperforming nan marketplace by a important margin.

ChartData by YCharts

We will look to see what nan prospects of nan business look like. This will impact an study of nan financials of nan business and its existent developments successful nan EV space. Many group look to person nan sentiment "Once nan accepted car makers perpetrate afloat to nan EV space, Tesla is finished". We would for illustration to adhd a sound to this opinion, arsenic it has been galore years and nan spread seems to beryllium widening connected paper, not closing.

Economic conditions are looking tough:

The world system has knowledgeable a robust betterment from nan pandemic-induced recession of 2020. However, nan velocity of betterment varies among countries and regions, pinch immoderate still facing important challenges. The awesome rumor now is nan emergence of ostentation and nan corresponding lifting of liking rates arsenic a intends of counteracting it.

Inflation has been a interest globally, pinch galore countries reporting higher-than-expected ostentation rates. This is chiefly owed to relaxed historical monetary policy, proviso concatenation disruptions arsenic businesses struggled to ramp up production, arsenic good arsenic nan Russian penetration of Ukraine impacting power prices. Central banks person mostly taken a gradual attack to raising rates, owed to fears of triggering a recession and further destabilizing their economies. This is particularly nan lawsuit successful nan Eurozone, wherever excessively precocious a complaint could efficaciously bankrupt nations specified arsenic Italy.

ChartData by YCharts

Inflation is problematic successful nan automotive manufacture arsenic consumers acquisition an erosion of their discretionary income and businesses spot an summation successful their costs of producing vehicles. Thus it leads to a autumn successful profits connected nan proviso and request side. Further, precocious liking rates summation nan costs of borrowing. Consumers will find it much costly to finance nan acquisition of a caller vehicle, frankincense deterring many, and businesses look a higher costs of capital, expanding their operational costs.

Our outlook for 2023 is that liking rates will stay elevated owed to ostentation not easy coming down. The ECB is expected to attack monetary argumentation decisions pinch other caution, arsenic European economies are mostly rather fragile. Prolonged elevated liking rates and ostentation person a bully chance of causing a recession, which will only exacerbate what we are seeing now.

Electric vehicles are nan future:

The Electric Vehicle (EV) manufacture has seen accelerated maturation successful nan past decade. Growth successful caller conveyance income is forecast astatine a CAGR of 17% successful nan adjacent 5 years, pinch millions of cars already being produced.

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Vehicle income (Statista)

The accrued request for EVs is driven by respective factors specified arsenic rising concerns complete ambiance change, a activity toward sustainability, legislation, and advances successful technology. The manufacture is comprised of respective cardinal players pinch Tesla presently starring nan pack, boasting a double-digit marketplace share.

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Vehicle income by marque (Statista)

To proceed its market-leading position successful nan automotive industry, Volkswagen has been investing heavy successful its EV department. The institution has announced plans to motorboat a scope of electrical cars and is moving to modulation its existent fleet to electrical vehicles. We must retrieve that nan mostly of vehicles nan business sells are ICE-powered, truthful Volkswagen must equilibrium its efforts successful some areas. Despite these efforts, Volkswagen still lags down manufacture leaders specified arsenic Tesla. The logic for this is nan technological and trading advantage gained from being nan first mover. Tesla's vehicles are perceived to beryllium much developed than different EVs and person less EV downsides (ease of charging, artillery life, etc).

Batteries stay nan superior area of weakness for Volkswagen. Despite nan company's caller announcement of a $20BN investment successful artillery factories, nan exertion still lags down Tesla's. In position of conveyance range, Volkswagen's champion offering falls short of Tesla's Model S (and X) pinch 340 miles per complaint compared to 405. While nan spread successful artillery life has decreased, Tesla still holds an advantage pinch 50% much expected miles. Despite this, Volkswagen has nan advantage of manufacture expertise, marque value, and large-scale production.

Volkswagen predicts they will surpass Tesla successful EV income by 2025, but this whitethorn not beryllium a existent occurrence arsenic nan company's technological superiority will not beryllium nan driving unit down this achievement, alternatively it will beryllium owed to its standard advantage.

Volkswagen's existent financial floor plan is based connected having respective starring brands / models successful nan market. If Volkswagen were to go relegated to a second-rate standard producer, it could consequence successful semipermanent separator contraction and a diminution successful marque image. This imaginable threat is compounded by Tesla's caller value cuts, which will trial Volkswagen's expertise to stay competitory and avoid having to discount its vehicles. As nan beneath shows, they are already operating connected bladed margins comparative to Tesla.

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Margins (Reuters / Visual Capitalist)

Autonomous vehicles are besides nan future:

The improvement of autonomous vehicles is besides a increasing inclination successful nan European automotive industry. Automakers are investing successful these caller technologies arsenic a intends of making vehicles safer, much businesslike (particularly for transportation), and amended connected to nan Internet. Volkswagen believes that AVs will beryllium mainstream arsenic early arsenic 2030.

The AV manufacture is expected to thrust important changes successful nan proviso concatenation and logistics of galore industries. With AVs, vehicles will beryllium capable to recreation and make deliveries autonomously, reducing nan request for quality drivers and frankincense expanding efficiency. The marketplace will disrupt not conscionable nan individual conveyance marketplace but nan commercialized 1 also. The existent worth of AVs initially will beryllium successful this respect successful our view. Long-term, location is nan anticipation that we person AV taxis, AV buses, AV rental services etc, frankincense reducing nan request for individual vehicles.

The AV manufacture is besides changing nan competitory scenery of nan automotive sector. New players, specified arsenic exertion companies (Microsoft (MSFT), Alphabet (GOOG) (GOOGL), and Baidu (BIDU)) and ride-sharing companies, are entering nan marketplace and competing pinch established automakers. This is creating unit connected nan automakers to innovate their AV exertion to stay competitive. This has been difficult arsenic AV exertion is fundamentally software, which is not successful their area of expertise. Our interest present is that nan exertion businesses person greater resources to put successful this space, importantly having nan technological superiority to entice customers away.

Volkswagen is having immoderate teething issues successful this area, pinch a self-driving start-up it invested $2.6BN into shutting down. Volkswagen has claimed to beryllium driving astir Hamburg and Munich autonomously, but specifications are not forthcoming. There are even rumors that nan merchandise of their first AV, scheduled for transportation successful respective years, could beryllium wholly canceled. This is pursuing much rumors that Audi's task will besides beryllium canceled. Unsurprisingly, Volkswagen is struggling pinch nan exertion broadside of nan improvement process, seemingly delaying its expertise to travel to market. Expertise and resources unsocial should mean Volkswagen bring thing to consumers successful nan coming years, however, we are presently concerned arsenic to really competitory this will be.

Deliveries are up:

Although marketplace conditions propose economical weakness, deliveries are still up successful December 2022 compared to nan anterior year. This is still down erstwhile comparing nan full year, but early 2021 was heavy impacted by post-lockdown request which somewhat distorts nan numbers.

Volkswagen deliveries

Dec22 Deliveries (Volkswagen)

Of these deliveries, All-electric vehicles reached a 6.9% stock of full deliveries. 572,100 BEVs were delivered to customers successful FY22, which is 26.3% up from nan prior-year period. This suggests nan EV conception is still a mini portion of nan wide business but is increasing healthily arsenic nan business ramps up its suite of vehicles.

Volkswagen's rebound successful China continues to prime up nan pace, pinch a 22.8% emergence successful December 2022 deliveries compared to nan twelvemonth prior. The betterment is attributed to nan lifting of lockdowns and nan solution of disruptions caused by COVID. This presents a imaginable opportunity arsenic China's "Zero-Covid" argumentation has travel to an extremity successful caller months. While nan contiguous effect whitethorn origin difficulties owed to nan ongoing dispersed of nan virus, nan semipermanent outlook is bullish owed to nan extremity of lockdowns.

Historical financial performance:

CapIQ extract

P&L (CapIQ)

Volkswagen has faced a challenging play arsenic its gross only precocious surpassed its FY19 figures.

Growth betwixt FY20 and FY21 was rather impressive, continuing into nan LTM period. Demand bounced backmost from nan deficiency of conveyance usage successful FY20 quickly, driven by fiscal support provided by Governments. The boost successful request for vehicles post-lockdown has been hindered by a spot shortage, starring to value increases crossed nan committee by manufacturers and dealers. Unfortunately, they were incapable to afloat capitalize connected it. This is apt nan logic for request spilling into FY22, moreover though economical conditions person slowed.

Although operating and nett profit maturation appears promising, it is important to statement that profits from FY18 to FY20 were impacted by nan solution of ineligible cases.

CapIQ extract

Balance expanse (CapIQ)

Despite its caller performance, Volkswagen's financial position remains solid. The institution has refrained from taking connected excessive indebtedness to compete pinch Tesla. Volkswagen's debt-to-EBITDA ratio has remained comparatively unchangeable astatine astir 5x since 2012.

The automaker's existent indebtedness standing is favorable, indicating that it tin unafraid further backing astatine charismatic rates if basal to broaden its electrical conveyance and autonomous conveyance offerings.

https://www.volkswagenag.com/en/InvestorRelations/fixed-income/ratings.html

Credit standing (Volkswagen)

Comparable capacity and comparative valuation:

Relative performance:

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Volkswagen's comparative capacity (CapIQ)

The European automotive marketplace is characterized by a wide uniformity among nan starring brands erstwhile assessing financial performance. This is owed to nan maturity of nan manufacture and nan precocious level of competition.

However, Volkswagen is lagging compared to its peers. The institution has a disappointing FCF yield, which has only surpassed 8% doubly successful nan past 10 years. This said galore of nan automakers listed supra person inflated FCFs owed to nan different quality of existent trading. Additionally, Volkswagen has a higher level of debt, which only exacerbates its underperformance.

Tesla, connected nan different hand, is an exception. The institution operates successful a different convention from nan remainder of nan manufacture erstwhile it comes to capacity metrics. However, it's important to retrieve that Tesla is nary longer conscionable an automaker, and comparing it to accepted car companies whitethorn not beryllium appropriate.

Valuation:

Volkswagen Valuation

Valuation (Tikr Terminal)

Given nan comparative underperformance of nan business successful existent trading terms, our anticipation would beryllium for a corresponding discount successful nan valuation to beryllium present. We will exclude Tesla from each discussions to follow, owed to nan constituent made above.

Volkswagen looks to beryllium trading astatine 1x, a discount to nan mean of these comps connected an NTM EBITDA basis. Further, Volkswagen's mean humanities EBITDA aggregate is 7.5x, again suggesting nan business is trading astatine a discount to its "average" position successful nan market. This looks to america arsenic if markets are pricing successful nan risks associated pinch nan execution of its afloat modulation to EVs / AVs. The mobility is, of course, is nan discount capable to adequately bespeak nan consequence to investors. This is incredibly difficult to reason connected but what we tin opportunity is that nan adjacent largest world automaker car institution trading astatine a little aggregate is Volvo, which does not travel adjacent to nan world footprint of Volkswagen.

For those who person religion successful Volkswagen's activity aliases nan brand, acquiring nan institution astatine its existent value could beryllium a bully opportunity, fixed its humanities mean EBITDA aggregate suggests it's adjacent to a bottommost (5x).

Key risks:

Our study of Volkswagen suggests that nan superior situation facing Volkswagen is keeping gait pinch newer entrants successful nan marketplace successful position of technology. The proviso concatenation and infrastructure are location to beryllium utilized. The consequence arises from imaginable technological inadequacy, which is not a halfway competency for Volkswagen. This poses a worldly consequence to nan company's expertise to execute nan modulation towards EVs and AVs.

To tackle this weakness, Volkswagen has taken proactive steps, specified arsenic investing successful various tech companies done its package section Cariad and forming partnerships pinch exertion firms.

Examples include:

  • Cariad acquisition / JV narration of Horizon Robotics.
  • Cariad acquisition of nan Automotive section of Intenta.

Conclusion:

Volkswagen has precocious undergone immoderate important changes, each of which we work together with, arsenic it allows Management to much greatly attraction connected its halfway business areas, and connected what fundamentally moves nan needle. Importantly, finance is being made into areas of weakness, which should let nan continued modulation towards EVs to beryllium a success, though we are much skeptical astir nan AV transition.

Critics person been reliable connected Volkswagen and different companies successful their displacement to EVs, but nan reality is that request for ICE-powered vehicles remains beardown and cannot beryllium abandoned overnight.

Volkswagen's existent valuation reflects its underperformance. We struggle to spot capable grounds that capacity will improve, however. Taking into relationship nan existent economical challenges and nan important finance required, it is excessively soon for america to see nan institution arsenic a semipermanent opportunity.

With net announced soon, location is nan chance nan banal pops akin to Mercedes, but our maneuver would beryllium to look to prime up shares successful nan coming months if Volkswagen's valuation falls to nan 5-6x NTM EBITDA region.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Welbeck Ash Research floor plan picture

The attraction of our investigation is to supply insightful and caller ideas, done heavy bottom-up business analysis. We look to show a communicative and place nan hallmarks of sustainable quality. Our position is nonsubjective and not sway by nan emotion of marketplace sentiment and short-term desires.

Disclosure: I/we person a beneficial agelong position successful nan shares of VWAGY either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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