Last summer, I wrote an article about Volkswagen (VLKAY.PK) with a title of Volkswagen Is Truly An Underdog. Back then, Volkswagen's share price was $28.66. Today, the company is worth $43.47 per share. If there is one thing I regret about my investment with this company, that is not having bought more shares. Back then, I had full faith in the company but I only bought 200 shares of it, which was a mistake on my side. Now that the shares had a massive rally, is Volkswagen still a buy, or did it run its course?
Undoubtedly, the car companies have been outperforming the market since the last summer. Ford (F) is up 35% and General Motors (GM) is up 46% in the last half of 2012. Obviously, part of the Volkswagen rally was due to the fact that the entire industry was taking off. At the same time, this was because the entire car industry was ridiculously valued at single digit P/E ratios. Even after a strong rally, many car companies are still undervalued by a large margin. First, car companies got hit hard during the recession of 2008-09 where a couple of them came very close to going bankrupt. Second, the earthquake in Japan and the floods in the Southeast Asia hurt many car companies in the supply side. Finally, the European recession hurt many car companies in the continent and almost every car company announced huge losses in the continent. While some of these issues still persist, the investors were overly worried that things would get even worse. Thankfully, things didn't get worse and the car companies started to take off.
Recently, Volkswagen's CEO Martin Winterkorn said that the year of 2013 would be as difficult as 2012 if not even more difficult. Mr. Winterkorn also added that Volkswagen was well-positioned to answer any challenges that may come ahead and that the company would beat the industry average in growth rate once again in 2013. The company's Golf car seems to be selling really well and most of the brands under Volkswagen have been performing greatly in the developing nations, particularly China. On another positive note, even though the company expects to spend a lot of money on new investments such as the new technology, facilities and models, it doesn't expect its operating margins to fall compared to 2012. This is great news for the investors.
In the next 3 years, Volkswagen plans to invest $65 billion dollars in measures that are expected to fuel further growth for the company. This is impressive as it comes at a time many car companies are cutting back on investments due to excess supplies, particularly in their European operations. Volkswagen wants to become the world's largest car company by volume within 5 years. The title currently belongs to General Motors. Volkswagen has more than 10 brands and a nicely diversified portfolio in its hands and the company can do wonders with it as long as the global economy allows it to do so.
In the first 10 months of 2012, one of Volkswagen's leading brands Audi reported a revenue growth of 14% compared to the same period in 2011. During the period, the brand was able to sell 1.22 million cars globally and most of the growth came from China, as the volume of cars sold grew by 30% in the country compared to the last year. Even in the continent of Europe where the demand for cars fell for 5 years in a row, Audi was able to post a volume growth of 4% year to year.
Another Volkswagen brand, Porsche posted 20% sales growth and 23% income growth globally. In China, the growth rate was as high as 35%. Most of the growth can be attributed to the company's new model 911. Currently there is a huge market for luxury cars in the developing nations and this demand is expected to double in less than 5 years.
USA in North America and Brazil in South America are two of the hottest markets for the company. Volkswagen expects continued growth at healthy levels in these two countries. By 2020, Volkswagen's Audi brand expects to double its sales volume in both countries, which is a very attainable goal for the company given its performance in the recent years.
We don't have the numbers for December yet; however, in the first 11 months of 2012, Volkswagen sold 8.29 million cars. This is up 11.7% from the first 11 months of 2011 when the company was able to sell 7.51 million units. Also, the 8.29 million cars sold in the first 11 months of 2012 is an all-time-high for the company. In fact, the company sold more cars in the first 11 months of 2012 than all of 2011. In 2011, Volkswagen's total revenue was $153 billion for the entire year, whereas the company was able to generate revenue of $143 billion in the first 3 quarters alone in 2012. Volkswagen's 2012 revenues will be pretty close to $200 billion when it's announced.
Volkswagen is highly profitable and the company has healthy amount of cash flow at the moment. Despite spending heavily on investments mentioned above, the company has $25 billion in cash at the moment. Given the company's market value of $100 billion, the high level of cash holdings offer a deep discount (about 25%) for the investors. In the last 4 quarters, Volkswagen's total net income was $23 billion, giving it a P/E ratio of 4 which falls to 3 after discounting for the company's cash reserves. Volkswagen's debt of $91 billion should not scare you, because most of that debt belongs to the company's finance department, which issues loans for the people who buy cars from the company. These loans typically have very low delinquency rates.
Volkswagen could easily support a P/E ratio of 13-15, because this is a growth company with a lot of potential in the international markets. I love that Volkswagen's management is very brave about investing tens of billions of dollars in growth measures at a time many car companies are cutting investments all over the place. The company loves to take risks and its risks have been rewarded greatly in the recent years. In the next couple years, I see no reason why the company shouldn't trade for $75 per share.