Volkswagen Stock: Old But Still Attractive (OTCMKTS:VLKAF)

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Sjo

The transition towards Electric Vehicles (EVs) is effectively underway, with sales doubling in 2021 to six.6 million globally. Volkswagen AG (OTCPK:VWAGY), as soon as the largest incumbent automobile producer, has pivoted decisively during the last two years and is now strongly positioned to compete for the rising market share for EVs. I consider Volkswagen shall be a structural winner within the EV transition race for the next causes:

  • Volkswagen is provided with a load of money that enables the corporate to gas its transition to develop into a worldwide participant within the EV area. It has the most important funding spend in EV and software program globally, amounting to 100 billion USD through the years, fueled by its secure Combustion-engine car (CEV) enterprise.
  • Volkswagen has overtaken Tesla (TSLA) in mixture gross sales in Norway, the nation with the best EV adoption. It is starting to take over market share in China, at present probably the most crucial market, with gross sales ending at 118,000 BEV in Q2, a complete share of 6%.
  • Lastly, in its aggressive transition, Volkswagen has achieved revenue margins equal to its CEV enterprise virtually two years forward of schedule, permitting the corporate to scale up its EV enterprise whereas conserving its profitability ranges secure.

Due to their low cost valuation, buying and selling at a P/E ratio of simply 3.91, and my perception that Volkswagen will stay among the many prime 3 automobile producers for the foreseeable future, I fee the corporate with a “buy” ranking with a good valuation of 256.50 USD for the VLKAF shares.

Chart
VLKAF knowledge by YCharts

Overview

One incessantly forgets nearly how massive Volkswagen is because the model is a conglomerate consisting of Volkswagen, Audi, Porsche, Skoda, and extra, in addition to a 90% majority stake in Traton SE (OTCPK:TRATF), a producer of vehicles with manufacturers comparable to MAN, Scania, and Navistar. In 2021 Volkswagen ranked first in income amongst all world automobile producers. Yet, of the 8.6 million vehicles they offered in 2021, solely 453,000 had been electrical autos, a share of whole gross sales of about 5%. In each their automobile and truck enterprise, Volkswagen goals to speed up the shift in the direction of electrification, with Volkswagen having the purpose of promoting round 700,000 EVs in 2022. The group’s goal is to promote 2.5 million BEVs by 2025, a share of ~25% of whole deliveries. While car gross sales have declined by round 25% from 2019 figures, revenues elevated by 6% over the identical interval. The gross sales decline could be defined primarily by provide constraints because of the strict lockdown coverage in China and, most just lately, by the Russia-Ukraine warfare, severely impacting Volkswagen’s OEMs to ship essential parts.

Volkswagen revenue and operating margins

Revenue and working margins (Volkswagen Investor Presentation)

Improving provide chains

In their most up-to-date Q2 earnings name, administration guided bettering unit gross sales from the lows in Q1 2022, with unit gross sales recovering in May and a transparent upward pattern in June with greater than 800,000 deliveries worldwide. The pattern is fueled by accelerating gross sales in China, the place deliveries had been up 27% YoY. Production started to ramp up within the second quarter, and administration expects to ramp up manufacturing even additional, permitting the corporate to higher serve the excessive demand, particularly for its EV merchandise, particularly the ID.3, ID.5, and ID.Buzz, with order consumption in Western Europe up 40% in comparison with the 12 months prior. Semiconductor and wiring harness shortages continued to affect the corporate’s potential to provide. However, provide chain points have begun to ease during the last month and are anticipated to enhance even additional over Q3 and This fall, which ought to give the corporate a lift for its H2 2022 gross sales outcomes. Traton SE has been severely hit by the overall provide chain scarcity, capping manufacturing capabilities at 65%, and is effectively positioned to develop gross sales when provide chain shortages proceed to ease within the following quarters.

Some of the elements drawback

As acknowledged above, the Volkswagen group consists of a number of notable manufacturers, for which Ryan Daniels laid out a compelling valuation case again in 2019 already. I might argue that little has modified immediately and that, hypothetically, valuing the Volkswagen manufacturers one after the other would lead to the next mixture valuation. Management has realized the problem, which is why it has began segregating the manufacturers and itemizing some on their very own on the market. Most notable was Traton SE’s formation by a squeeze-out within the fall of 2021 to type a market chief within the heavy-truck phase. In addition, relying on the market phase for the second half of 2022, Volkswagen plans to IPO Porsche as a privately listed firm, amongst different causes, to resolve the “sum of the parts problem.”

Valuation

For my analysis, I’ve performed a full-blown DCF with variations to think about eventualities that exemplify outcomes under, at-par, and above expectations. To consider the totally different alternate options, I utilized a 50-basis level addition/subtraction from each prices of capital and perpetuity progress fee to estimate a variety of truthful values for the totally different eventualities. As the bottom case, I used a price of capital of 8.5% based mostly on a bunch of friends consisting of 10 incumbent automobile producers like BMW (OTCPK:BMWYY), Mercedes (OTCPK:MBGAF), Toyota (TM), BYD (OTCPK:BYDDF) and likewise think about newer EV firms, I included Tesla and Rivian (RIVN) within the group of friends. The perpetuity progress fee of 1.5% as the bottom situation is an approximate weighted common of historic GDP progress based mostly on gross sales per nation. It must be considered as a conservative base case. Due to excessive uncertainty concerning future gross sales, I’ve income rising at a slower fee for the years 2024, 2025, and 2026. For income progress, my enter projections for 2022 are within the decrease vary of steerage and accelerating progress for 2023 based mostly on my assumption of bettering provide chains. Since Volkswagen has already managed EV revenue margins to match these of CEV, I regard a long-term EBITDA margin of 14%, as has been the case traditionally, as a sensible situation. Based on the belief talked about above, my mannequin estimates a good worth for the stock of 256.50 USD, an upside of 38.8% from the place it trades on August twenty fourth.

Volkswagen DCF

5Y DCF (Authors supply)

If provide chain shortages prevail, strategic initiatives fail, or for different causes, Volkswagen doesn’t accomplish the gross sales or profitability ranges listed above, I estimated the truthful worth for such a situation at 193.02 USD or 4.5% upside from present ranges. If gross sales and profitability surpass expectations, significantly if progress in Asia stays sturdy, the stock might attain a value of 341.05 USD, an upside of 84.6% immediately.

Sensitivity analysis Volkswagen

Authors supply

Conclusion

While Volkswagen doesn’t enchantment to buyers with the identical hype and 50%+ progress prospects for the approaching years, in my view, it trades effectively under its truthful worth. I count on the market to understand this worth as soon as the trade consolidates extra over the following 2-3 years and when provide chain worries begin easing a bit extra.



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