Volkswagen (OTCPK:VWAGY) is a German automobile manufacturer with several brands under its name. The company had been facing headwinds lately, but is now back to growth and the last quarter showed that results are once again come in force.
Note: I previously covered Volkswagen in another article titled:
Volkswagen is undervalued and perfectly positioned for a cyclical recovery:
In the article, I noted that Volkswagen’s price is trading at a fairly low price and that despite the declines caused by the pandemic, the stock was clearly undervalued over the longer period, mainly due to the good range of products. Since then, Volkswagen has launched several new models and has clearly established itself as a leader in electric vehicle sales, especially in Europe. This is explained in more detail in the article.
Volkswagen’s Future Better Than Current Stock Price Suggests
Overall, the company financials point to a relatively cheap valuation, and while automakers are reasonably expected to struggle in 2023 as financing costs continue to rise, the current valuation at a number from Volkswagen indicates a relatively cheap stock. The company currently has a valuation of around 5x earnings, which is usually reserved for declining companies. But Volkswagen is anything but in decline, the company is actually on the rise. Considering that revenues are rising, despite declining global passenger sales, and margins continue to rise, combined with clearly dominant market dynamics, this indicates that Volkswagen stock is relatively cheap.
Despite pressure on passenger car volumes, VW continues to outperform
Between January and September 2022, the global passenger car market volume decreased slightly overall year-on-year (-4.3%), mainly impacted by bottlenecks and disruption of global supply chains due to the shortage of semiconductors, the coronavirus pandemic and the repercussions of the Russian-Ukrainian conflict. While the global markets in Asia-Pacific, Middle East, South Americathe ica and africa regions showed slight to moderate growth, other sales regions experienced lower volumes. North America and Western European regions saw significantly weak sales volume. The volume of sales fell very sharply in the Center and Eastern Europe.” – Third trimester call
Electric vehicle sales boosted total deliveries, which rose 10% year-over-year for the third quarter. In large part, these deliveries were driven by the sale of their electric vehicles which increased by 25%.
Europe saw a significant increase in plug-in car sales, primarily with a record 2.18 million cars sold. Meanwhile, passenger car registration also continued to show significant improvement at 17%, showing that things are slowly coming back from the post-pandemic effects. The general trend shows that electric vehicles are improving significantly, as are sales of passenger cars.
Another factor driving car sales is the average age of the vehicle/car market. Cars were already old in 2020, but the pandemic has further set back car sales, making the average car even older. Additionally, shutdowns in China and North America and inflationary factors have caused many people to refrain from buying new cars. Now that base effects are dissipating and China is beginning to reopen, companies such as VW are ready to take advantage of new models again, and product refreshes should continue the recent momentum of positive revenue growth.
Volkswagen has been relatively successful with its ID models and should increase its momentum again with the new ID.4 and ID.7 being very affordable and globally competitive plug-ins with ranges of up to 275 miles on the ID.4. The competitive nature of electric vehicles has held up relatively well compared to their counterparts, and even higher-end models. This bodes well for Volkswagen which is looking to pursue a two-segment strategy, where it continues to offer traditional engines in its luxury segment but also offers an electric alternative in its more affordable segment. Electric vehicles as a percentage of total car sales also continue to rise. The ID series now ranks among the best-selling models in Europe, which means that at a time when electric vehicles represent a large percentage of total sales, VW is booming.
Rising finance costs not likely to deter car buyers
Financing costs are also rising, but Volkswagen’s demographics with those buying the premium cars and those buying the more affordable segments may not need as much financing. Financing costs have increased in Europe and North America, which means automakers continue to struggle. Therefore, I expect VW to withstand the effects of the changes much better than its counterparts.
The national average for the United States was 5.27% in funding, and costs in other countries are also rising. But with the age of the vehicle, what it is and Volkswagen’s portfolio targeting the affordable and luxury segments means finance costs are less likely to be an overall issue.
Order book and margins
Currently, there is a significant backlog for the company; there has been a shortage of semiconductors in recent quarters, which has led the company to face adverse effects. These negative effects resulted in probably shorter earnings than before. Vehicle sales were down from 2019, but revenues have continued to rise in recent years. This is due to a combination of improving product sales mix and rising prices. The sustainability of the strategy remains uncertain as we head into 2023, as consumers have already begun to show a slowdown in spending as pandemic-era economies fade. Some of the price increase has resulted in improved margins, but this is unlikely to be sustainable as there are only a limited number of price increases that consumers will accept.
In addition, Volkswagen should benefit from its reopening in China. As more and more consumers who previously held back their spending continue to do so. This is another important factor, as VW continues to be a relatively well-known and successful brand in China.
But risks also remain, as the global slowdown continues to affect consumer purchasing power. Inflation rose in Europe and remained stable in the United States. So, although earnings continue to be robust for the time being, the company may find itself in a situation in the future where lower savings and continued inflation, with an increase in the unemployment, are holding back sales to the point where the current valuation may not hold up.
But, for now, the future remains bright and Volkswagen will likely continue to face multiple tailwinds as people continue to buy its vehicles. Cars such as Audi models, electric, sedan and affordable sedan segments will likely continue to show strong returns compared to their counterparts. This could mean that the stock will eventually go up. Although the broader market continues to be under pressure, Volkswagen remains a value stock, with a robust business model and an improving future, due to the price-earnings valuation remaining low, earnings not are not really threatened.
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