Volkswagen Group (VWAGY) – Recommended Buy

Current Price (as of 3/15/2024): $14.36

Fair Value: $19.77 

 

Volkswagen Group (VWAGY) is the world’s biggest automobile company in terms of annual revenues of $300.6 billion. This German automotive manufacturer encompasses a variety of brands, including Volkswagen, Volkswagen Commercial Vehicles, ŠKODA, SEAT, CUPRA, Audi, Lamborghini, Bentley, Porsche, and Ducati.

 

VWAGY intends to transition to all-electric vehicles in numerous markets by 2035, with aspirations to potentially emerge as the world's leading electric vehicle (EV) brand by 2030. Presently, Volkswagen Group ranks third among EV manufacturers, trailing behind BYD and Tesla. Investing in VWAGY stock now is essentially a wager on the future dominance of EVs over traditional gas-powered vehicles, with the anticipation that VWAGY will spearhead this EV revolution. In addition to the optimistic outlook for global EV adoption, VWAGY presents investors with an attractive dividend yield of 6.58%.

Positive Outlooks

 

-       VWAGY is effectively implementing its electrification strategy, with sales of its battery electric vehicles (BEVs) surpassing 770,000 units across all brands in 2023, marking a notable increase of approximately 35% compared to 2022. Arno Antlitz, Volkswagen Group's CFO, anticipates further growth in BEV sales with the introduction of new models. Currently, only a small portion of VWAGY's segments have been electrified, indicating significant potential for expansion in this area.

 

-       VWAGY aims to expand its offerings in China. Despite the intense competition in the Chinese market, VWAGY unveiled the All-electric Volkswagen ID.UNYX on March 13, 2024, specifically tailored for China's domestic market. The ID.UNYX will be produced by VWAGY's joint venture in China, known as Volkswagen Anhui.

 

-       VWAGY set to grow its operations in the USA. Volkswagen Group intends to introduce electric SUVs and pickup trucks in the USA through its brand, Scout Motors. The Scout SUV will rival Ford's electric Bronco and Jeep's electric Recon. Similarly, the Scout pickup truck will compete with BEVs offered by Ford, GM, Rivian, and Stellantis.

 

-       Volkswagen Group is considering the possibility of taking its subsidiary, PowerCo, public. PowerCo, a battery company owned by Volkswagen Group, was established by Volkswagen in 2022 with the aim of becoming a global leader in battery cell production. VWAGY intends to eventually make PowerCo publicly traded, enabling Volkswagen Group to optimize its return on investment through the funds raised from PowerCo's initial public offering. Additionally, PowerCo is planning to expand its operations by establishing battery cell factories in Salzgitter (Germany), Valencia (Spain), and St. Thomas (Canada) in 2025, 2026, and 2027, respectively.

 

-       The EU Commission is considering imposing tariffs on imported Chinese BEVs. To initiate this process, the EU Commission commenced a registration procedure on March 7, 2024, which is necessary for imposing tariffs on EV imports from China. The objective is to shield EU manufacturers such as Volkswagen from intensified competition from Chinese EV manufacturers. However, the China Chamber of Commerce expressed disappointment with this action, warning that it could lead to retaliatory measures from China. If China were to impose tariffs on European auto imports, it would have adverse implications for the sales of VWAGY's brands like Porsche, Audi, Lamborghini, Bentley, and Volkswagen, as these companies generate 25 to 50% of their sales from China.


Negative Outlooks

 

-       Volkswagen anticipates a 3% increase in customer deliveries for 2024, a decrease from the 11.8% growth experienced in 2023. The company attributes this declining growth to weakened consumer demand resulting from high inflation.

 

-       Volkswagen Group faces intense competition in the Chinese market from Chinese EV manufacturers who benefit from subsidies. VWAGY predicts reduced operating profits for its Chinese joint ventures in 2024 due to the tough competitive environment in China. Volkswagen Group expects a proportionate operating profit of €1.5 billion to €2 billion in 2024, compared to €3.280 billion and €2.621 billion in 2022 and 2023, respectively.

-       Global EV sales are projected to decelerate in 2024. According to Bloomberg, the growth rate of EV sales worldwide is expected to decrease from 33% in 2023 to 21% in 2024. This trend raises concerns for companies like Volkswagen Group that have made substantial investments in EVs. Selling EVs has become more challenging due to inflation driving up auto prices and higher APRs on automobile loans (currently around 7%). As a result, mainstream consumers are finding it difficult to afford EVs at this juncture. Meanwhile, tech-savvy affluent consumers have already adopted EVs.

 

-       Volkswagen Group announced its decision to halt the development of a fourth battery factory site under its PowerCo business. The company cited lower-than-expected demand for EVs in Europe as the reason for this pause in plans.

 

-       The stock price of VWAGY has dropped from $34.15 in 2021 to $14.36 today. This decline in valuation may be linked to the significant investments the company has made in electric vehicles. Investors might be concerned that EVs won't yield as much profit as traditional cars, or that the transition to electric vehicles will progress slowly.


Valuation

The table above shows that the trailing twelve-month (TTM) P/E ratio is 4x, which is lower than the average of 6.46x over the given time period. If the stock returns to its mean P/E ratio of 6.46x and earnings per share for 2024 remains flat or close to the average of $3.06, then the fair value of VWAGY stock would be at least $19.77. This implies a 37.65% increase from its current price of $14.36.