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As the automotive sector moves into recovery mode, one giant seems to have been overlooked: Volkswagen AG (OTCQX:VLKAY). In this article I present an overview of the stock in comparison with the other big car makers: Toyota (NYSE:TM), Honda (NYSE:HMC), Daimler (OTCPK:DDAIF), Ford (F), General Motors (GM) and Nissan (OTCPK:NSANY). I make a case for the exceptional valuation of the stock, which, along with its 2.32% annual dividend, makes it a strong consideration as the best buy in the recovering auto sector.

Most of the data here originated from Yahoo finance and S&P.

The Company

Volkswagen Group is a German multinational that designs, manufactures and distributes passenger cars, commercial vehicles, motorcycles, engines and turbomachinery. Volkswagen AG has its primary listing on the Frankfurt Stock Exchange and is a constituent of the DAX index. Secondary listings are on the London Stock Exchange, Luxembourg Stock Exchange, New York Stock Exchange (OTCQX:VLKAY) and SIX Swiss Exchange.

Volkswagen sells Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda and Volkswagen passenger cars, Ducati motorcycles, and commercial vehicles from MAN, Scania and Volkswagen Commercial. Volkswagen has been the number one automobile manufacturer in Europe for over two decades.

The auto sector in the U.S. is in a full-on recovery. Morningstar notes this here recently, pointing out that there have been three straight years of double-digit percentage year-over-year increases. Volkswagen has had a part in that upward trend with their US sales for 2012 breaking a record set in 1970.

Worldwide, Volkswagen AG set another company record in 2012, selling more than 9 million vehicles for the first time as global sales more than offset the sluggish European market. European sales have yet to see comparable movement. The New York Times reported recently "No End to Falling European Car Sales."

Price Performance

VLKAY is up 20.3% for the last 12 months. YTD, however, the stock is down 12.6%. The stock price began moving up again in mid-April and recently crossed its 50 and 200 day moving averages. (see chart from StockCharts.com).

(click to enlarge)

Compared to its peers. share price performance for the year is in the middle of the pack:

Mkt Cap $M

1yr.

TM

206,362.70

46.67%

HMC

73,173.30

18.37%

DDAIF

61,137.30

15.07%

VLKAY

58,634.30

20.89%

F

55,862.40

34.22%

GM

44,098.40

41.04%

NSANY

43,505.60

9.34%

average

26.51%

Valuation:

Relative valuation is quite positive with the P/E ratio at 3.52, forward P/E estimated at 6.01, P/Sales at 0.37 and P/Book at 0.89. Compare these numbers with the automaker's peer group:

P/E [TTM]

Forward P/E

PEG Ratio

P/Sales

P/Book

TM

19.07

13.17

0.41

0.68

1.32

HMC

15.49

13.19

0.68

0.58

1.14

DDAIF

8.98

11.85

-1.69

0.42

1.22

VLKAY

3.52

6.01

0.14

0.37

0.89

F

9.63

8.55

0.91

0.41

3.17

GM

10.95

7.37

0.55

0.29

1.62

NSANY

11.27

11.27

14.13

0.36

1.02

average

11.27

10.20

2.16

0.44

1.48

Revenue growth and profit margins lead the pack by a substantial margin:

Revenue Growth

Profit

1yr (%)

Margin (%)

TM

Toyota

3.9

4.4

HMC

Honda

-10.7

2.7

DDAIF

Daimler

9

5.3

VLKAY

VW

22.7

11.2

F

Ford

-1.5

4.2

GM

GM

1.3

4.1

NSANY

Nissan

7.7

3.6

4.63

5.07

Dividends:

As is the norm for European companies, dividends are distributed annually. Last distribution was $0.91 for a yield of 2.53%. Dividend growth has been steady since the recession and has been following EPS growth as expected.

Dividend

DGR (1yr)

DGR (5yr)

Yield

EPS ($US)

2013

$0.9097

14.93%

61.94%

2.53%

2012

$0.7915

30.06%

10.12%

2.65%

19.41

2011

$0.6086

43.08%

1.73%

13.56

2010

$0.4253

-16.70%

2.12%

6.14

2009

$0.5106

-9.10%

0.80%

0.93

2008

$0.5618

65.38%

0.99%

4.49

2007

$0.3397

1.09%

3.02

A note of caution is evident in earnings. Although earnings are up slightly for the year, the trend is showing a slight deceleration.

TTM Operating EPS

Quarter

June 2012

10.13

Sept 2012

12.32

Dec 2012

12

Mar 2013

11.25

June 2013 (est)

10.5

Analyst Opinion

I've found five analysts who cover VLKAY. There are 3 Buy ratings, 1 Outperform and 1 Underperform. The StarMine Equity Summary Score is 9.8 (Very Bullish). Finally, Morningstar gives the stock four stars (a valuation rating).

Summary

Volkswagen AG is an exceptionally well valued stock at current prices. The hesitant earnings growth gives pause, however, as does the incalcitrant European economy. One might expect this to turn around as Europe--still Volkswagen's largest customer base--inevitably emerges from its economic woes. In the meantime, Volkswagen is expanding its global presence, particularly in the western hemisphere where they have a recently announced plan to expand manufacturing facilities in Mexico. In any case, earnings growth does not seem sufficiently slack to justify the exceptional valuations for the stock. There is, of course, always the possibility of a value trap, but that seems unlikely. Volkswagen is a well-established and solidly managed company in a recovering industry. I would anticipate a reasonable upswing in its stock price over the next several months, and a strong move if and when the European economic situation begins to improve.

Disclosure: I am long VLKAY.

Source: Is Volkswagen The Buy Of The Automobile Sector For The Value-Oriented, Dividend Investor?