With the current state of the electric vehicle market in the U.S., American investors may get the impression that the only EV stocks around are Tesla (TSLA, Financial) and perhaps Rivian (RIVN, Financial) or General Motors (GM, Financial). There are a few other EV startups that have not really gotten off the ground yet, and most legacy automakers plan to break into the EV market eventually, but we cannot deny that the present market is saturated with Teslas.
However, that will not be the case forever. Now that American consumers are gaining interest in EVs, more competitors are entering the field. One of those competitors is popular European EV maker Volkswagen AG (XTER:VOW3, Financial)(VLKAF, Financial). With Volkswagen’s strong brand image, solid balance sheet, attractive dividend and plans for greatly expanding its EV offerings in the U.S., could this be the ultimate EV value stock?
U.S. expansion
Last week, after months of rumors that Volkswagen was planning on expanding its U.S. operations, Volkswagen of America CEO Scott Keogh told CNBC that the company was “actively looking” to add new assembly and battery factories in North America to complement its existing facilities in Tennessee and Mexico.
The German automaker’s EV efforts in the U.S. are currently centered on the Tennessee plant, where localized production of the VW ID.4 crossover EV is set to start later this year.
While the company is still evaluating its options and has yet to make a decision on the exact location of any new factories, we can likely expect investments in automotive facilities, whether new or expansions, to represent an investment worth billions of dollars.
Keogh’s comments follow the grand opening of Volkswagen’s new $22 million electric vehicle battery lab near its Tennessee plant. The new lab, one of four such facilities the company plans to build globally, will test and optimize batteries specifically for the U.S. market.
In terms of scale, Volkswagen has been importing the ID.4 from Germany since last year in limited quantities of about 800 to 2,000 cars per month. The monthly production rate at the Tennessee plant is expected to reach 7,000 by the end of 2022.
Volkswagen also plans to revive the Scout brand as part of its efforts to gain market share in the U.S. Specifically, under the Scout brand, the automaker has plans for a North American market electric pickup truck and an SUV. Prototypes are scheduled to be released in 2023, with production expected by 2026. The new Scout EVs will revive the name of the iconic International Harvester Scout.
Strong fundamentals
Something that is often overlooked about Volkswagen is its strong fundamentals. Even though it has a long history, this company is not living on the edge of bankruptcy; it has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10.
The interest coverage ratio of 16.63 and Piotroski F-Score of 8 out of 9 show the balance sheet is strong. Profitability has been fairly consistent over the years with the exception of 2015, when the company was rocked by the fallout from the emissions scandal, in which it cheated pollution emissions tests in the U.S. and was fined $2.8 billion.
Worldwide, Volkswagen sold 231,600 EVs last year, hampered somewhat by supply chain constraints, and they hope to end this year with twice as many EV sales. By 2025, the company aims for 20% of its vehicles to be electric.
For perspective, Lucid (LCID, Financial) hopes to scale up to 90,000 vehicles a year, and Rivian recently confirmed its production guidance for 25,000 EVs in full-year 2022. Tesla’s trailing 12-month EV production comes out to just over 1 million units, but the company's market cap is also seven times as high as Volkswagen’s.
One major positive of Volkswagen’s strong balance sheet is that it pays an extraordinarily high dividend considering the industry it operates in. With a dividend yield of 4.07%, there are very few auto manufacturers that match it on the dividend front. Since this is a highly cyclical industry, though, the dividend cannot be considered reliable, and the annual dividend payout relies on the company’s success in the given year.
Valuation
In terms of valuation, Volkswagen trades at a low price-earnings ratio of 3.82. For a cyclical company, this is the kind of price-earnings ratio we can generally expect at the top of an earnings cycle before a cyclical downturn.
However, Volkswagen’s share price is down substantially from all-time highs reached in March 2021. The GF Value chart rates shares as modestly undervalued.
It is tough to value automotive stocks at the moment due to the global push to go electric. The world needs to replace more gas-powered cars with EVs, which incentivizes governments to subsidize EVs. If gas prices continue to climb, customers will be more likely to make their next car an EV as well.
The electrification trend has pushed the valuations of pure-play EV companies to sky-high levels reminiscent of tech growth companies, but so far, this has not really spilled over to legacy automakers that are going electric. Investors are cautious about legacy automakers being unable to surpass gas-powered vehicle sales with EV sales, which is a legitimate concern that could keep earnings multiples low.
On the flip side, more established automakers already have experience producing, marketing and selling cars at scale, which could help them expand their operations faster than pure-play EV competitors.
Takeaway
Volkswagen’s plans to expand its operations in the U.S. could dramatically boost its EV sales in a growing market that is in need of more options. In addition to a comprehensive growth strategy, the company has a strong brand reputation, solid fundamentals and a good dividend.
It also looks undervalued based on the GF Value chart. While a low price-earnings ratio is typically indicative of the top of a market cycle for cyclical stocks, and that could still very well be the case here, we also need to consider that the growth of the EV market could cause the shares of automakers to buck the historical trend.
