ii view: VW profit dives, but better than feared

It's been a tough few years for this automotive giant but is mud from the journey now hiding a bargain? 

Full-year 2020 update

• Operating profit before special diesel related items of around €10 billion down 48%
• Automotive net cash flow of around €6 billion

ii round-up:

Automotive giant Volkswagen (XETRA:VOW) flagged a near halving in 2020 operating profit to €10 billion as dealerships were closed and production halted under the global pandemic.  

But deliveries to customers continued to recover strongly in the fourth quarter, surpassing the third quarter, and helping the owner of brands including Audi, Seat and Skoda to beat analyst forecasts for 2020 profit of nearer to €5 billion.

VW shares rose by more than 2% following the announcement, leaving them up around 80% since the March lows, although still down around 5% over the last year. Shares for US rival Ford Motor (NYSE:F) are up by more than a quarter over the last year. Shares for electric vehicle maker Tesla (NASDAQ:TSLA) are up over 600%.

The German car giant previously confirmed that it had missed European Union targets on CO2 emissions from its passenger car fleet last year and faces a fine of more than €100 million.

VW, which in recent years has been shaken by an emissions scandal, also suggested that the first quarter of 2021 and the year as a whole face new issues from supply-chain production impacts and higher CO2 related costs. A global shortage of microchips needed for vehicle production by all manufacturers is being battled.

Average CO2 emissions for its new passenger car fleet fell by around a fifth during 2020 compared to 2019. Deliveries of electric models in the EU including the UK, Norway and Iceland increased more than fourfold in 2020 to a total of 315,400 electric vehicles. The proportion of battery electric vehicles (BEVs) and plug-in-hybrids (PHEVs) in the total deliveries rose to 9.7% compared to 1.7% in 2019.

VW is, according to management, the clear market leader in the all-electric segment in Western Europe, accounting for a share of around 25% and up from 14% in 2019. 

Key figures for 2020 are due to be disclosed at the end of February, with further details given at its annual press conference on 16 March.

ii view:

Along with Volkswagen itself, group brands also include Bentley, Bugatti, Lamborghini, and Porsche. Both MAN and Scania are among its commercial offerings. In 2019, its home German market accounted for around a fifth of sales, Europe two-fifths, both Asia-Pacific and North America came in at around 17%, while Latin America made up the balance. 

For investors, a pending CO2 related EU fine adds to VW’s dented reputation over recent years., compounding its operational battles and periods of halted production under the global pandemic. However, arguably the rise of Tesla and demand for electric cars now heads the long-term agenda for its management. 

That said, an increase in the proportion of BEVs and PHEVs across its total deliveries to customers to nearly 10% clearly identifies management action. Strong brand names and market positions are also not to be dismissed. Neither is an estimated share price to net asset value of under one. That compares to Ford at 1.4 times and Tesla at over 100 times, suggesting potential long-term value could now be up for grabs. 

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
• Coronavirus disruption to both production and sales

The average rating of stock market analysts:

Buy