Volkswagen AGThu 18 October 2012
Recommendation type: Growth
Lee Wild
Europe's motor industry may be in crisis, but Volkswagen is doing better than others and sales in China are racing ahead. It's already the world's most profitable carmaker and, with Porsche added to its garage of classy marques and an ambitious cost-saving plan under way, that gap will get bigger.
VW made an operating profit of €6.5bn (£5.2bn) in the first half of 2012, almost twice as much as General Motors (GM), the world’s largest producer. A 12 per cent increase in sales to over 4.6m vehicles easily outpaced rivals and now means one in every eight cars that rolls off the forecourt is a VW, Audi, Seat or Skoda.
If all goes to plan, Europe's largest carmaker will sell more than 10m motors a year by 2018, compared with a record 8.4m in 2011. Even with an 8 per cent drop in Europe last month, sales are up 10 per cent so far this year to 6.7m and, given problems at both Toyota and GM, VW could claim the world number one spot before long.
Much of that growth will come from China, where VW has 20 per cent of the world's biggest car market. It made €2.6bn there last year and sold 2m cars in the first nine months of 2012, up 18 per cent. In six years, VW will have doubled production in China to 4m cars and there's talk of a new budget brand in 2015, too.
China's territorial spat with Japan over disputed fishing islands is having unintended benefits, too. Sales of Japanese brands are well down, and Chinese drivers have been buying Audis instead. Sales of the four rings - with double-digit profit margins, easily VW's most profitable brand - were up a fifth.
North America will be important, too. VW lost money there for years, but has been grabbing market share - now 4 per cent - and 431,600 cars have been sold there so far this year. That's up 34 per cent and puts VW on track to hit its 800,000 target by 2018.
Back in Germany, a groundbreaking production line is set to save VW billions of euros. Its Modular Transverse Matrix, or MQB, creates a standardised box of parts that can be added to a variety of cars. Theoretically, the company could make the Polo, Beetle, Golf, Scirocco, Jetta, Tiguan, Touran, Sharan and Passat on the same assembly line. There should be a net benefit as early as next year, and experts reckon it could slash costs by 30 per cent, saving VW more than €2bn a year between 2014 and 2016 and €15bn by the end of the decade.
Eventually, more than 6m VWs could be made this way, including the new Golf MK VII. It's a massive project and one that rivals will struggle to replicate. Get it right and analysts at Deutsche Bank think VW could hit its financial targets for 2018 - 8 per cent pre-tax profit margin and 10m cars - three years early. That would imply operating profit of over €18bn in 2015, free cash flow above €8bn and a 9 per cent margin, up from 7.1 per cent last year.
Almost half that extra money will come from Porsche. VW finally bought the half of the sports car maker it didn't own in August for €4.6bn, or €7bn including debt. Sales were up 13 per cent last month to almost 12,000 and Deutsche Bank's forecast for sales to double over the next decade looks feasible. What's more, Porsche has already proven itself during a downturn, and there's an annual free cash contribution of up to €1.5bn, too. It also means that, from next year, resilient premium brands, in particular Audi and Porsche, will generate well over half of VW's profit.
Even at the less glamorous end, heavy trucks brand MAN is expected to make over €1bn in 2013 and the much higher-margin Scania business €1.3bn, despite the sharp slowdown in Europe and South America.
Share tip summary
Overcapacity in Europe has soured sentiment, as has the fear of a hard landing in China, but VW preference shares, which are much more liquid than the ordinary shares, are rated on just 6 times forecast earnings. That's a big discount to arch rivals BMW and Daimler and well below their historic average. With those massive cost savings to come, too, VW is a premium brand at a bargain price. Buy.
