Volkswagen AG: Quarterly Performance Review And Growth Outlook

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About: Volkswagen AG ADR (VWAGY)
by: Aitezaz Khan
Summary

The technical analysis indicates a correction in share prices.

VWAGY delivered a mild Q3 2018 that was followed by a stronger Q4.

An alliance with Ford Motors will help Volkswagen retain its market share.

Volkswagen has an attractive valuation among peers.

Thesis

In this article, I have included a technical analysis of Volkswagen AG (OTCPK:VWAGY) which indicates that a good entry point would be within the range of ~$16.15. Nevertheless, an evaluation of VWAGY’s valuation in relation to industry peers indicates that VWAGY is trading cheaply even at the current prices.

VWAGY has delivered a mild Q3, however, Q4 will be strong because VWAGY has increased its unit sales during Q4. During the nine months ended September 2018, VWAGY has witnessed a Y/Y decline in the unit sales of its prime brands namely Volkswagen Passenger Cars and Volkswagen Commercial Vehicles. In my view, this is a point of concern for investors.

However, the company’s recent strategic alliance with Ford Motors should help improve things going forward, as it would enable both companies to share technologies and facilities. The alliance is also expected to help both companies achieve cost efficiencies and strengthen the operating margins as these companies collaborate for the launch of new heavy commercial vehicles (expected within the next 3-5 years).

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499909095375361.jpg

Figure-1 (Source: 5Mods)

The technical analysis indicates a correction in share prices

VWAGY’s 52-week price range is between $14.70 and $17.95. At the time of writing, the stock last traded at ~$16.60 (slightly above the median value of $16.325). Based on the 52-week price range, we can say that the stock has witnessed a price variation of ~22% considering the highest and lowest prices observed during that period. However, as shown in the technical price chart (Figure-2), the share price has remained largely volatile during the past 6 months. An extension of the trend lines indicates that the stock may witness more decline in the short term, and may find support near (or below) ~$16.15.

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499879810554452.png

Figure-2 (Source: SA)

This view is also supported by the recent increase in short-selling activity (a significant increase of ~31%) that indicates the likelihood of more downside from the current levels. Have a look at Figure-3 that reflects the change in short-selling activity.

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499879815728486.png

Figure-3 (Source: ShortSqueeze)

A mild Q3 is followed by a stronger Q4

VWAGY has delivered an unimpressive Q3 2018. The company lost ~3.6% Y/Y (during the quarter) in terms of the unit sales that declined from ~2.642 MM to ~2.548 MM units (Figure-4). The quarterly production also witnessed a ~8% decline, Y/Y.

However, on an aggregate basis for the three quarters, VWAGY recorded an improvement in the number of units produced, sold and delivered. The improvement is indicative of the fact that H1 2018 was generally stronger (on a Y/Y basis), but was followed by a weak Q3 2018.

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499891920249271.png Figure-4 (Source: Q1-Q3 Interim Report)

Q3 also suffered on account of operating profitability. Despite posting a 1% increase in Y/Y Q3 sales, VWAGY saw a towering 19% decline in Q3 operating results. Then again, the overall picture improved during the 9-months from January to September 2018.

At this point, it's pertinent to note that the Volkswagen Group comprises of twelve different brands of renowned passenger and commercial vehicles. The brands combined under the umbrella of VWAGY include VW Passenger Cars, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, VW Commercial Vehicles, Scania, and MAN (Figure-5).

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499891511112983.jpeg Figure-5 (Source: Medium)

[Note: The following discussion pertains to the three quarters, on aggregate basis].

When we consider the operating results of some of these major brands we can identify some red flags for the company. During the period under review, VWAGY delivered ~8.1 MM vehicles to its customers (Figure-6) and increased its operating income (Figure-7) from ~€ 13.23 BB to ~€ 13.31 BB (or approx. 0.6%). However, operating results associated with the ‘Volkswagen’ brand vehicles witnessed a significant decline of ~7% and ~10% respectively.

[Note: The ‘Volkswagen’ brand vehicles refer to VW Passenger Cars and VW Commercial Vehicles].

In my view, the mediocre performance of the ‘Volkswagen’ brand is an important concern for the company. The staggering performance of these two brands could be elaborated in terms of a decline in operating profitability (as mentioned above) despite a ~1% and ~3% increase in the unit sales of VW Passenger and VW Commercial vehicles, respectively.Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499879819110646.png Figure-6 (Source: Presentation)

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499879831597784.png

Figure-7 (Source: Presentation)

In contrast, the SKODA and SEAT brands delivered encouraging results (refer to Figure-6). VWAGY’s unit sales generally remained stronger during July and August 2018. However, they suffered on account of a changeover to the WLTP (read: Worldwide Harmonized Light Vehicle Test) procedure. VWAGY’s September sales suffered ~3.3% on a Y/Y basis, but the monthly sales decline was witnessed by the automobile industry as a whole (Figure-8).

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-1549987981569559.png

Figure-8 (Source: Previous article on Seeking Alpha)

However, in terms of units delivered to customers, I believe that VWAGY's Q4 2018 would be stronger than Q3. The graph in Figure-9 shows that after witnessing a decline in vehicles delivered during September 2018, the company's deliveries went up since October 2018 and has remained at ~1 MM units throughout November and December 2018.

Description: https://static.seekingalpha.com/uploads/2019/2/12/48748470-15499908566702256.png Figure-9 (Source: Q1-Q3 Interim Report)

An alliance with Ford Motors will help Volkswagen retain its market share

In January 2019, VWAGY announced an alliance with Ford that would enable both companies to explore options for technology collaboration. It's expected that initially, both companies would jointly make pickup trucks. Going forward, they plan to build commercial vans jointly, and further explore the options to create electric/ autonomous vehicles. The pickup trucks are expected to be built by FY 2022 and the combined efforts should help reduce costs and improve margins for both manufacturers. In my view, this alliance would mean that both companies would be able to share their marketing and distribution operations.

The significance of this alliance increases, as the combined launch of new products, would help VWAGY retain its dominance in terms of market share. It should be noted that during FY 2018, VWAGY emerged as the world’s largest automobile manufacturer, for the 5th year in a row, (if we include the sales of heavy-duty vehicles). During FY 2018, VWAGY’s total auto sales amounted to ~10.83 MM units, recording a ~1% increase Y/Y. However, excluding sales of heavy-duty vehicles, VWAGY’s passenger and light commercial vehicle sales (~10.6 MM units) ranked next to the number of vehicles sold by the Renault-Nissan-Mitsubishi alliance (that amounted to ~10.76 MM units)

Volkswagen has an attractive valuation among peers

In the preceding discussion, we have discussed VWAGY’s growth outlook. At this point, an important consideration is the valuation of the company at the current price levels. As shown in Figure-10, VWAGY’s current price is marginally lower than the 200-day SMA, indicating that it’s safer to enter at the current prices.

Figure-10 (Source: YCharts)

Moreover, when we compare the price valuation multiples for some other major automobile manufacturers (many of which are included in Figure-8 above) we can see that VWAGY has a sweet valuation, in terms of price to book values (Figure-11).

Figure-11 (Source: YCharts)

Furthermore, in terms of the PE ratio, VWAGY has an appropriate valuation that lies within the lower end of the industry range (Figure-12). If we consider both price valuation ratios in tandem, it’s easy to identify that VWAGY is relatively cheaper compared with selected peers.

Figure-12 (Source: YCharts)

Conclusion

In the preceding discussion, we have seen that VWAGY has posted a mild Q3 2018 that was followed by a stronger Q4. The company is facing a decline in unit sales of the ‘Volkswagen’ brand vehicles, however; the impact of such decline is partially offset by an increase in the unit sales of the ‘SEAT’ and ‘Skoda’ brands.

Nevertheless, VWAGY managed to remain the world’s largest automobile seller during FY 2018 if we include the sales of heavy commercial vehicles. Without heavy vehicles though, VWAGY’s sales fell next in line to the unit sales of another major global alliance of renowned automobile manufacturers. However, in an effort to prolong its dominance as the world’s largest automobile seller, VWAGY has entered into an alliance with Ford Motors for joint manufacturing of heavy vehicles that should help improve the quality, and also lower the production costs of such vehicles.

Moreover, based on the technical price chart and the short selling activity, it appears that the stock might undergo a correction. However, the stock is trading under the 200-day SMA and has an attractive valuation compared with industry peers. Hence, the stock is a buy at current prices.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.