ii view: premium brand demand drives VW estimates higher

Shares for this car giant are up over a third year-to-date. We assess prospects.

First-quarter results to 31 March

• Sales revenue by 13% to €62.4 billion
• Operating profit rose to €4.8 billion from €900 million
• Deliveries up 21.2% on Q1 2020 to 2.4 million vehicles
• Electrified vehicles more than doubled to 133,300 units

Chief executive Dr Herbert Diess said:

“We started the year with great momentum and are on a strong operational course. This is clearly reflected in our positive quarterly figures. At the same time, we remain fully committed to our transformation into a climate-neutral and software-driven mobility group. Our successful e-offensive continues to gain momentum and we have significantly expanded it with attractive new models. We are also making good progress with the key topic of digitalisation and have reached important milestones. There is still much more we can achieve in the remainder of the year.”

ii round-up:

Car maker Volkswagen (XETRA:VOW3) today reported a strong recovery in profit following the pandemic hit first quarter of 2020. 

Increased sales, particular in China, helped generate an operating profit of €4.8 billion in the quarter, up from last year’s €900 million, although that was in line with analysts’ forecasts. Increased sales of higher margin premium cars such its Audi and Porsche ranges also helped management drive its expectation for full-year operating profit margin up to a high of 7% from a previous 6.5% estimate. 

Volkswagen shares retreated by around 2% in European trading, having more than doubled since pandemic lows in March last year. Year-to-date, VW shares are up by more than a third, similar to US rival Ford (NYSE:F). Shares for electric car maker Tesla (NASDAQ:TSLA) are down around 5% during 2021. 

Sales of VW’s electric vehicles more than doubled to 133,300 units. Early in the year it outlined plans to build six battery factories in Europe along with raising its electric vehicle sales targets. 

A shortage of automotive chips cut production by around 100,000 vehicles during the quarter to the end of March. The industry shortage shows no sign of easing according to management. 

VW anticipates that – assuming successful containment of the Covid-19 pandemic – deliveries to customers in 2021 will be significantly up on the previous year amid continued challenging market conditions. 

ii view:

Along with Volkswagen, its total of 12 brands includes Bentley, SEAT, Skoda, Lamborghini, and Porsche. Both MAN and Scania are among its commercial offerings. It operates more than 110 production plants with over half located in Europe and around a third in Asia. Products range from motorcycles to low-consumption small cars and luxury vehicles. In the commercial vehicle sector, it makes pick-ups, buses and heavy trucks. 

For investors, a share price gain of over a third year-to-date will soon battle much tougher sales comparatives in China and other regions as the early impact of the pandemic washes through. Its emissions scandal of recent years has dented its reputation, while Tesla now sits at the front of the starting grid in the electric vehicle consumer brand awareness stakes. 

That said, new battery plants, elevated sales targets and a more than doubling of electric vehicle sales in this latest quarter suggest VW is not standing still. A diverse stable of strong brand names and existing market positions is also not to be overlooked. For now, and following a recent rerating of the shares, investors may wish to wait for further evidence of growth before adding to any existing holdings. 

Positives:

• Strong brand names including Audi and Porsche
• Diversity of grill badges helps even out the ups and downs of each

Negatives:

• Air quality concerns and taxation changes have led to falls in diesel sales
• Pandemic disruption to both production and sales

The average rating of stock market analysts:

Buy