Volkswagen Is Truly An Underdog

| About: Volkswagen AG (VLKAY)

Solid financials, strong growth, high quality brand name and a lot of potential would define Volkswagen (OTCPK:VLKAY) very well; however the company doesn't get the attention it deserves among investors. The company keeps getting punished for the troubles in Europe, even though it posts a lot of growth outside of Europe. The market thinks Volkswagen is worth $66 billion, however it is worth way more than that.

Balance Sheet

The company currently holds cash of $27 billion and short term investments of $9 billion. If we add net accounts receivables to this number ($17 billion), we are looking at $53 billion, which is near the company's market value. The company's assets total $330 billion and its liabilities total $255 billion, giving it a total equity of $75 billion, just above its market value. The company's balance sheet is very healthy and the company's long term debt is a manageable $95 billion. In the last 3 years, the worth of the company's total assets increased by 38% whereas the company's share price plunged by 40%.


The company generated revenue of $198 billion in 2011. The company enjoyed gross margin of 17% and net profit margin of 10% during the same year. As a result, the company earned $19.26 billion, giving it a P/E ratio of 3.4. Some may say that Ford's (NYSE:F) P/E is also a similar number, however keep in mind that Ford's 2011 income includes a huge one-time tax benefit.


Volkswagen enjoys impressive growth all over the world. Some of the company's growth comes from acquisitions, and the company's current brands see huge growth in the developing world. The company's revenue is up 50% in the last 2 years and it is up 25% in the last year. The company sold 8.361 million cars in 2011, up 15% from 7.278 million cars in 2010. This is particularly impressive in a year when global economy experienced a slow down. The company's sales growth rate was 21% in North America, 9% in Western Europe, 30% in Central/Eastern Europe, 17% in China, 100% in India and 5% in Latin America.


As of 2012, the company owns at least part of many car brands including Volkswagen, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Scania and Man.


The company pays annual dividends. The yield and rate usually depends on the company's cash flow, however one can look at the past few years to have an idea about the future dividends. In 2010, the company's dividend yield was 2.69%. In the next year, the company's dividend yield was a comparative 2.67%. This year the company made one dividend payment of 58 cents, yielding 2.03%.

The dividend tax withholding rate in Germany is 26.38%. American citizens are eligible for a tax refund of 11.38%, which will make their effective tax rate 15% on dividends of Volkswagen. Also, the company pays its dividends in Euro currency. The actual yield might depend on currency exchange rates.

A Word of Caution to US Investors

Volkswagen doesn't trade on the NYSE. The company's ADR shares are sold in the OTC market. While the company's ADR share price movements generally track the share prices in Germany, the volume is much lower, providing less than expected liquidity. The average volume in this stock is about 55,000. In the short term, the stock might be subject to more volatility than one might expect.

Future Growth

As the company works out integration of the new brands such as MAN and ramps-up production in plants around the world, its growth rate will continue to beat the market. The company plans to invest nearly $20 billion in Chinese market and nearly $3 billion in developing more energy efficient vehicles. The company continues to play its cards right in order to take advantage of the changing dynamics of the world economy.

When the European debt crisis is out of focus, (I don't say when it is over, because I don't expect it to be solved this decade; the market will just learn to live with it) this stock will skyrocket. For example, last year when the LTRO was announced in December, the stock took off and rallied from $26 to $34 within weeks. Currently the stock price is down to $28 again; however, the slightest catalyst can lead another massive rally in this stock, as the company is undervalued by large margin. Given its fundamentals and growth rate, Volkswagen's true value is easily above $40 per share.

Disclosure: I am long F, OTCPK:VLKAY.