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Volkswagen

February 13, 2013 | About:

Volkswagen (VLKAY) is one of the three largest auto manufacturers in the world (with GM and Toyota). VW owns a variety of brands, VW, Audi and Porsche included. Current financial metrics:

Dividend: 1.4%

P/E: 3.2 (versus GM P/E of 10 and TM of 20)

P/B: 0.6

In the first 11 months of 2012, Volkswagen sold 8.29 million cars, up 11.7% from the first 11 months of 2011 (sold 7.51 million units). It is taking market share in the declining market of Europe. China makes up 30% of its sales and it is investing in the remaining BRIC countries. The U.S. is a mature car market where it competes steadily but does not represent an inflection point.

Note that the large debt figure in the GuruFocus chart is driven by the financing arm of VW (to the best of my understanding). This is broadly diversified debt.

VW has embarked on a cross-platform engine/part sourcing/sharing program that is years ahead of any competitor (see http://en.wikipedia.org/wiki/Volkswagen_Group_MQB_platform for general description). The cost of this is tens of billions of dollars. However, it also represents a huge potential cost savings.

So what is not to like? The auto industry is intensely competitive with new players from India, South Korea and China all driving down margins. VW does not pay a significant dividend, even with $25 billion of cash. Europe may be stuck in the doldrums for years. Operating cash flow appears to be about $7.6 billion, much less than Toyota (over $20 billion).

Why do I still like VW? With a P/E of just over 3 versus a traditional auto maker P/E of around 8, strong international sales, diverse brands and a potential game-changing strategy (MQB), this company (that has been around forever) seems to be a safe investment with potential increase in equity valuation. Based on revenue streams in the past, I see no reason to think that earnings will be highly volatile outside of volatility correlated with global expansion/contraction. Even if earnings are stagnant, it is hard to see this stock suffering much. If market share and revenue continue to grow, VW may return to a more traditional valuation.


Rating: 2.0/5 (4 votes)

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