VWAGY - Volkswagen: China Concern Overblown Valuation Looks Attractive

2024-06-28 04:58:49 ET

Summary

• Management is aggressively cutting costs through its performance program and recently announced bullish 2030 profitability targets.
• Protectionism and deglobalization will protect Volkswagen from Chinese EVs.
• Concerns over Volkswagen's Chinese business are overblown because it accounts for a fraction of Volkswagen's income.
• Volkswagen disproportionately benefits from a slower transition to EVs in Europe.
• Volkswagen stock is trading at a discount to my estimate of intrinsic and relative value.

Introduction

Volkswagen (VWAGY)(VLKAF) is down ~35% from its 52-week high. The stock has traded sideways since 2015, so VW is clearly out of favor and arguably oversold.

I'm bullish on Volkswagen because while the stock price has been in freefall, the fundamentals have meaningfully improved over the last year. Volkswagen's margins should improve because management recently implemented a performance program and a new value-over-volume strategy. R&D/CapEx spending is peaking this year and should fall over the next decade as management stops investing in ICE technology. Also, the EU recently increased tariffs on imported Chinese EVs. Higher tariffs benefit Volkswagen because VW (and other legacy automakers) are competitively disadvantaged relative to China. Additionally, I believe the transition to EVs will be slower than initially anticipated. It seems like these improvements in the business aren't reflected in the stock price because the stock has fallen ~25% over the last year....

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