Volkswagen: A Leader For Many Years To Come (OTCMKTS:VWAPY)

Introduction

We give Volkswagen Automotive Group (OTCPK:VWAGY) a rating of buy. Although their revenue growth is currently slowing down, they are undervalued based on their most recent earnings and have a strong business plan to adapt to the quickly changing automobile world.

Volkswagen is the second largest car manufacturer in the world next to Toyota (TM). They sell cars in 153 countries and operate plants in 19 countries, mainly in North America, South America, Europe, Asia, and Africa. It’s no doubt that Volkswagen is a huge company with a large global reach.

Poised for the Future Growth

Volkswagen’s future business plans put them in a position to continue to perform and adapt to the quickly changing automobile market. Volkswagen’s head of sales Klaus Zimmer has said that all car sales will go electric by 2035, and half of their car sales are expected to be electric by 2030. This is part of the company’s plan to become carbon-neutral by 2050. 73 billion Euros have been spent (50% of the company’s current investments) to develop the future of Volkswagen’s electric cars between 2021 and 2025. By 20230 Volkswagen plans to offer 25 new electric vehicles models to the public in the U.S., Mexico and Canada.

Not only does Volkswagen plan to fully transition into making electric vehicles but they also plan to invest in autonomous vehicles. Volkswagen says this will be into four categories: The self-driving system, its integration into its cars, the fleet management program and the mobility platform. In 2025, Volkswagen plans to launch its first fully autonomous mobility service. This will include things such as busses, car rental, rise sharing and ride-hailing.

As part of a deal with the U.S. Government Volkswagen has also launched a new program to increase electric vehicle infrastructure in North America and Canada. Volkswagen’s subsidiary company Electrify America will implement 1,800 fast chargers and 10,000 normal chargers by 2025. Electrify America operates 635 charging stations with about 2,850 fast charging spots currently running. Charging infrastructure is going to be necessary for the change from combustion engines to electric engines, and Volkswagen is setting themselves up to be a leader in that as well.

The company currently makes vehicles that fall into four categories: Passenger cars, light commercial vehicles, commercial vehicles and financial services. They also own companies Skoda, SEAT, Cupra, Audi, Lamborghini, Bentley, Porsche and Ducati. Volkswagen not only plans to go fully electric with their own vehicle line but with their other brands as well. These companies also plan to implement plenty of electric cars into their lineups. For example, Bentley plans to only produce plug-in hybrids and will also go electric by 2030.

The change to electric vehicles is coming quickly. Volkswagen’s plan to not only make electric cars but to also invest in autonomous driving technology, charging infrastructure, and mobility as a service puts them in one of the best positions in the market. Being a company with global reach and now a leader in autonomous driving and EV technology will only set Volkswagen up to continue to perform.

Recent Earnings (Q4 2021)

During their last earnings call, Volkswagen told investors that the Covid pandemic and global semiconductor shortage have caused vehicle sales for the Automotive group to decline by 6.2%. The war going on with Ukraine and Russia is also causing short-term problems, as Volkswagen has halted operations in Russia. They are still paying Russians 80% of their salaries and continue to supply Russian Volkswagen customers with spare parts. To make things even harder on Volkswagen they were recently forced to recall about 100,000 plug-in hybrids due to an issue that may cause them to catch on fire. In March of this year, Volkswagen also had to recall about 246,000 Atlas and Atlas cross sport models in Canada and the U.S., due to a faulty wiring problem that affected airbags, windows, and brakes. Although Volkswagen has had many troubles in the past 5-10 years, they are still making billions of dollars in profit and continue to perform as one of the best automakers on this planet.

Despite Volkswagen’s troubles, they were still able to grow revenues by 12% last year to 250 billion Euros. Volkswagen’s operating profit before special items was about 20 billion Euros and they grew their net cash flow to 8.6 billion Euros, a 35% year to year increase. Volkswagen became profitable in the U.S. again in 2021 as well as Mexico and Canada. 70% of sales came from their four main SUVs (The Atlas Models, Tiguan, Taos, and ID.4).

In the first half of 2021, Volkswagen reported that they had 26% market share of electric vehicles being sold in Europe. However, by the end of 2021 Volkswagen’s ID.3 was the second most sold electric vehicle in Europe, next to Tesla’s Model 3. The Renault Zoe was third, and the Volkswagen ID.4 came in fourth. Although Tesla (TSLA) may have had the most popular selling car Volkswagen still held more of the market share at the end of the year with 25%. Stellantis (STLA) (parent company of Renault) came in second at 14.5% market share while Tesla came in third at 13.9% market share.

Volkswagen missed earnings per share estimates by $0.48, posting an actual earnings per share of $0.87. They also missed on revenues by 1.12 billion and posted actual revenues of 69.64 billion (a 14.42% year to year decrease.) Although Volkswagen may have missed earnings this quarter, the rest of the year is very promising. Volkswagen Group said in recent earnings that they expect sales revenue to jump 8-11% in 2022 while estimating an operating return on sales of about 7-8.5%. Net cash flow is expected to stay at the same level as 2021, however.

Volkswagen had a great year last year, but we believe it will be even better this next coming year. When the microchip and semiconductor shortage starts to get better Volkswagen’s business will get a large boost, especially regarding their electric vehicle line. Volkswagen is not only investing in electric but also investing in technology such as self-driving cars and self-driving rideshare. Volkswagen has invested heavily into electric vehicle infrastructure with their American subsidiary company Electrify America.

Cheap Valuation to Pair With an Excellent Outlook

Toyota is the largest automobile manufacturer in the world while Volkswagen comes in second, and parent company of Mercedes-Benz, Daimler (OTCMKTS: DDAIF), comes in third. Volkswagen not only has a cheap valuation, but they also have excellent business and operating plans that will put them in the right place to succeed. We believe Volkswagen will continue to increase revenues, invest in innovation, and be a leader in the automotive industry. Based on their current financials and various stock multiples, Volkswagen is cheap and a great buy.

First, Volkswagen has a very low P/E (TTM) ratio of 6.91. That’s lower than Toyota’s 9.64 (largest automaker in the world), but higher than Mercedes-Benz 2.92 (third largest automaker in the world. On average, the consumer discretionary sector has a median P/E (TTM) of 13.43. Based on this, there seem to be many undervalued automobile manufacturing companies on the market. However, we believe that Volkswagen is still going to beat their competition in the next 5 to 10 years based on their pledge to go electric, investments, and market share in key areas across the world.

Another attractive multiple is their price to sales ratio. They have a P/S (TTM) ratio of .49, earning them an A+ on this metric from seeking alpha. Volkswagen’s P/S ratio is 70% lower than the consumer discretionary sector median of .93. On both P/E and P/S ratios, Volkswagen ranks near the top in not only the automobile manufacturing industry but the entire consumer discretionary sector as well. Toyota has a P/S ratio of .89, while Mercedes-Benz has a ratio of .48.

The price to book (TTM) ratio for Volkswagen is .49, compared to the sector median of 2.36. Toyota has a price to book ratio of 1.09, while Mercedes-Benz has a ratio of .90. This puts Volkswagen near the very top of their peers based on this multiple. Since November of 2007, the price to book ratio for Volkswagen has dropped significantly from 1.65.

Volkswagen’s year to year revenue growth of 12.26% may be worrisome to many investors looking for growth stocks. However, many of Volkswagen’s prior issues are starting to finally dissipate. For example, Volkswagen’s emissions scandal cost them over $20 billion dollars which has no doubt affected their free cash flows and revenue growth.

As mentioned above, Volkswagen’s year to year revenue growth is not that great, and their 5-year average revenue growth is only 3.03%. However, their operating cash flow increased 55% year to year and their 5-year average operating cash flow growth is 19.18%. Their Net income grew 73.47% year over year, while their diluted EPS grew 78.10%. The 5-year averages for these growth rates are 23.43% and 23.61% respectively. Their levered free cash flow increased 14.21% year over year and 22.60% the past three years, although the 5-year levered free cash flow growth average is -12.84%.

Because of their negative 5-year levered free cash flow growth rate, many investors would be worried that the company may not continue to grow. But as mentioned earlier, Volkswagen’s business plans are what is going to make them succeed; Not what they were doing five years ago. The emissions scandal cost them well over $30 billion euros. They’ve also been investing heavily in new technology. We expect Volkswagen to continue to grow because of multiple factors, especially including their market share and investment in electric vehicles and autonomous driving technology.

Potential Risk & Downside

Every investment has a risk associated with it. Volkswagen is no different. One of the main potential risks we see with Volkswagen is their debt. With more than $239 billion dollars in debt, Volkswagen is the most indebted company in the entire world. Much of this debt is tied to the large financing division of the company. Although Volkswagen is innovating and continuing to set themselves up for future growth, their high debts could cost them the future as net income growth and free cash flow growth could be inhibited. If the company cannot continue to grow cash flows and net income, the price of the stock could end up staying flat or declining.

Another risk we see associated with Volkswagen is a decrease in production due to the microchip and semiconductor shortage. If Volkswagen is not able to produce as many cars due to these shortages, the sales of the company could decline, and revenues could decline as well. The stock price of the company could then very well be affected by this potential decline in sales and revenues.

The only other potential risk we see in Volkswagen is the potential for a decline in revenue growth. As mentioned earlier, we do not see Volkswagen declining in revenues but increasing in revenues due to their pledge to go fully electric and their share in key markets. However, if Volkswagen does not find a way to increase revenues then the stock will have trouble gaining value. Although we believe Volkswagen will grow revenues in the future, there is always the potential for many factors to affect their potential growth rate. In the event, Volkswagen does not increase revenues or they stay stagnant, the stock price could potentially end up falling or could end up staying stagnant.

Much of the risk we see associated with Volkswagen lies in the company and not so much outside factors. If Volkswagen can increase revenues and free cash flows, find a way to deal with the microchip shortage, and continue to attack the electric vehicle market, we see them continuing to be a leader in the automobile industry and a great stock to buy.

Conclusion

Volkswagen is a strong company with a strong history. They have a large global reach, and they’re already a leader when it comes to electric vehicles. Volkswagen also will continue to invest in electric vehicle technology as well as electric vehicle infrastructure. We believe the car brands Volkswagen owns will also continue to thrive.

Volkswagen’s P/E, P/S, and Price/Book Ratios are all very low compared to the rest of the industry. They are undervalued and we believe they’re not only one of the best value stocks in the consumer discretionary sector, but also one of the best value stocks in the automobile manufacturing industry. There are some risks associated with Volkswagen, such as their large debt and slowing revenue growth. However, we believe the switch to electric vehicles and the way they have attacked the EV market will increase not only revenues but net income and free cash flows in the future. We believe the biggest mover for the stock price will come from increased growth in revenues and free cash flows.

Based on their last earnings report, future business plans, global reach, and longtime automobile manufacturing dominance, we give Volkswagen a buy rating. We believe they will continue to perform in the next 5-10 years and will be a leader in the EV market. Volkswagen is a great company with a cheap valuation; not to mention plenty of growth based on their future business plans.