2023-03-10 00:05:50 ET
Summary
- Volkswagen is a company I highlighted in my sector-focus article in the beginning of the year as being massively undervalued.
- Due to the complexity with Porsche and VW, my selection for investing has been a small position in Porsche, but a full position in Volkswagen via the native VOW3.
- VOW reported its FY results yesterday. The shares exploded nearly 11% in a single day, and a 16% dividend bump for the year, giving me a 7.3% YoC.
- I'm still at a "BUY" here, and this is why.
Author's Note: This article was published on iREIT on Alpha in early March of 2023
Dear subscribers,
If you remember my sector-specific article found on iREIT on Alpha, you'll note that I went and have been Long some companies for some time that have outperformed significantly in a relatively short timeframe. The full list in the sector, which was industrials, included:
- KION Group ( OTCPK:KIGRY )
- Porsche/Volkswagen AG ( OTCPK:POAHY ) ( OTCPK:VWAGY ) ( OTCPK:VLKAF )
- Stanley Black & Decker ( SWK )
- Stellantis ( STLA )
- Airbus ( OTCPK:EADSY )
- 3M Company ( MMM )
- BAE Systems ( OTCPK:BAESY )
(Source: Sectors to invest in/article )
Porsche/VW has been one of my main plays in the German automotive sector for some time. Specifically, I've had my eye on the company since the massive undervaluation despite earnings growth , as we can see since early 2022.
F.A.S.T graphs Volkswagen (F.A.S.T graphs)
Looking At Volkswagen
This is a BBB+ rated automotive company with a market cap, despite the drop, of over €80B and a TEV of closer to €250B. The company was the largest automotive manufacturer in the world for several years running in the mid-2010s and still retains the position as one of the world's largest, managing a €15B+ net income on a €280B revenue in one of the more difficult segments in the world.
It's obviously one of the most well-known brands on earth, with some of the most iconic automobiles produced in history, including the Beetle, Golf, The Volkswagen Van, and its close relationship with Porsche. Volkswagen also is much more than just VW, even if outside of Europe some of its sister brands are much less well-known. Volkswagen is the founding and namesake member of the Volkswagen Group, a large international corporation in charge of multiple car and truck brands, including Audi, SEAT, Porsche, Lamborghini, Bentley, Bugatti, Scania, MAN, and Škoda. You might not be familiar with some of these brands, such as Skoda or SEAT, but in Europe, some of them are even preferred to the iconic VW itself.
The company produces its vehicle across the entire planet, having manufacturing plants in Germany, Mexico, the United States, Slovakia, China, India, Russia, Malaysia, Brazil, Argentina, Portugal, Spain, Poland, the Czech Republic, Bosnia and Herzegovina, Kenya, and South Africa. In Germany alone, VW employs over 120,000 people.
It's also key to understanding the impact of Porsche on VW's business. For VW, Porsche represents only 3% of sales volumes, but at the same time, it's almost 24% of the VW operating result. Because of Porsche and VW's relationship, this provides some of the better margins and mix in the industry.
Now, some analysts argue that VW is "becoming attractive" and that the company might go lower. Me, I say that those analysts are missing the forest for the trees, and the company has already troughed - quite a while back, actually, when I started highlighting Porsche and VW more in late 2022 - that's when I really "loaded up" on the company, to where I now have a 4.33% in my private position and almost a 6.97% position in my corporate portfolio following yesterday's massive bounce in valuation.
Porsche share price (Nordnet)
This bounce in valuation does not make the company unattractive. What it does is accurately reflect the company's yesterday-reported figures for the Fiscal.
These figures include a double-digit increase in sales revenue of 12%, with a decline in actual vehicles offset by pricing and positioning, a 13% operating profit increase, net liquidity of over €43B including Porsche proceeds of €16.1B, a 26% increase in BEV deliveries with a sales share of 7%, and a dividend bump to a total pref (VOW3) dividend of €8.76 for the year, accounting for a payout ratio of 29.4% .
Those are some absolutely stellar full-year figures, and the reaction is warranted. The company further provided 2023E, with expected delivery over around 9.5M, another 10-15% sales revenue increase due to an incredibly strong backlog, with operating return on sales between 7-8.5%, and yet further increases in cash flow.
In short, Volkswagen is humming, and that makes "BUY"s at below €125, which is where I established most of my position, absolutely stellar, with already-seen RoR over 15% in a relatively short period of time.
All of these developments came despite supply chain impacts, the Ukraine/Russia conflict, inflation, macro, input costs, and interest rate increases. VW fought this using pricing discipline and cost efficiencies. Volkswagen also managed much of its plans and new ventures, including the IPO of Porsche, as well as the PowerCo battery company. The first cell factory in Salzgitter has been launched, with the ID.4 launch in the USA and more competitiveness in China due to ongoing partnerships with companies like Horizon Robotics.
The reason why things are likely to be even more positive in the coming year of 2023 isn't that hard to explain. The company is seeing easing signs along the supply chains, which is set to remove current bottlenecks and things preventing the company from servicing in full its growing and impressive backlog. Once this is done, the effects we're seeing are likely to increase, with more earnings and higher earnings actually expected.
We're likely to see more R&D spending as the company moves heavier into its BEV platforms, but the company nonetheless delivered a very solid outlook for the coming year - as follows:
Volkswagen Group anticipates that overall vehicle deliveries will rise to around 9.5 million in 2023 primarily driven by the strong order backlog on hand as semiconductor supply and logistics chain issues should ease in the course of the year. Volkswagen Group expects sales revenues to be 10 to 15 percent higher than the prior-year figure. In terms of operating result for the Group, an operating return on sales in the range of 7.5 to 8.5 percent is forecast for 2023.
(Source: Volkswagen IR)
Others' expectations are for results to continue to rise as well. I remind you that Volkswagen is a company that often times trades well above €200, with PTs above €245 in turn. At €142, it's still cheap - which I will showcase here in a bit. Current estimates for earnings and dividends are as follows.
VW Forecasts (TIKR.com)
What you see here is the reason why I'll be keeping, and expanding my stakes in Volkswagen if I see attractive prices. Even if R&D-related spending and other CapEx might slightly push earnings back to 2021 levels, the following years are very likely to deliver very solid returns, resulting in solid dividends around 29-30% in payout, which on my cost basis, is over 7% yield here. And that is a 7% yield from a BBB+ rated automotive company with a world-leading position.
Let's go through specific valuation details here.
Volkswagen Valuation - The upside is still very much there
Volkswagen currently trades at a native 6.3x P/E for the native VOW-ticker. There is here, the VOW3 ticker which I personally believe should be used for investing. The reason is that VOW3 is the preference share with a slightly higher yield, the only drawback being that you don't get a vote in the AGM. The preference share doesn't share the typical trends of Prefs, but rather trades fairly close to where the native non-pref share tends to trade.
F.A.S.T graphs Volkswagen (F.A.S.T graphs)
This fairly simple look and forecast of VOW, with a likely 8% average EPS growth over the next few years inclusive of 2022, means that an 8-9.5x P/E forecasts result in a conservative upside of 21.3% per year, or 72.74% total in 2025E. If you'd like to argue as to why Volkswagen isn't worth below a double-digit 10x P/E multiple, I'd be happy to field those arguments based not only on fundamentals, but on EPS trends and innovation if need be - but simply put, I believe the company is worth this multiple at the very least and might go beyond into 10-12x. This means a triple-digit RoR for Volkswagen is not outside the realm of extreme possibilities here.
At a 7%+ well-covered yield with a 30% payout ratio, that's a "case" I'm happy to make. VW is far better than Ford ( F ). It's definitely better than GM ( GM ) as an investment, and has stability and a dividend, unlike Tesla ( TSLA ). With the Porsche IPO and the company's current structure, I do not believe there is an automotive investment at this time that has a better nor safer upside, coupled with this sort of safe yield.
Volkswagen Upside (F.A.S.T graphs)
Peers are neither cheaper nor safer, not in relation to this. Analysts following the company give the Volkswagen AG ZC PRF PERPETUAL EUR , or VOW3, an average PT of €171, from a range of €111 to €295. That's a massive range, and it reflects where the company "could" go in the next few years. 21 analysts follow the company - 13 of them are at a "BUY" or equivalent here, with a 20% upside to the current average PT of €171. Even if the company, despite EPS growth, doesn't go higher than €170-€205 in the next few years, that's still an 8.5% annualized RoR based on a 6.7x P/E, with a 25% total RoR in 3 years.
However, I expect more. I expect at least for the company to revert to 8x, which at normalized current earnings comes to around €210/share. There is a long way for the company to go here, that is true, and there will be a lot of ups and downs on the way, I expect. However, I won't be selling or rotating my shares of Volkswagen before the company goes well beyond that share price.
The simple thesis here is, that the company is significantly undervalued to even a conservative forward Price target here. Volkswagen has been down for so long that analysts, based on this persistent valuation decline, are mistaking this for the company never rising up again or doing so quickly. This latest 10-11% climb is a good example of how this might happen. Volkswagen is a company of sudden movements.
I draw your attention to the period between March and April of 2021, when the company in less than 2 months advanced 63.39%, or annualized 5,000%. Again, it does happen. And this could very well happen again.
F.A.S.T graphs (F.A.S.T graphs)
Obviously, this is not something I am "betting" on. The reason that I "BUY" VW is that it is a company at an undervaluation. Even if the company only were to rise to €171 or slightly beyond, that's still an RoR that I'd be perfectly happy with.
This is what I try to find. I try to find win-win scenarios, or as close to them as I can possibly get - and Volkswagen, to me, is a good recent example of a win-win scenario worth considering.
For that reason, here is my thesis on the company.
Thesis
- Volkswagen is one of the largest automotive manufacturers on earth. It's conservatively leveraged, has great credit, a great, recently-bumped dividend, and has an upward potential of 60-70% that is in no way unrealistic. Even if the company only was to perform as expected today, that's still "good enough" to where you're likely to see market outperformance from the company.
- To me, this is what constitutes a "BUY", and a good prospect in an international stock for even the more conservative of investors.
- Because of that, I view the company as a "BUY" here, and I'm very heavily exposed to Volkswagen.
- My PT for the company is no less than €210/share.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
The company does in fact fulfill every single one of my investment criteria. Thank you for reading.
For further details see:
Volkswagen: Positive In January, Still At A 'Buy' Now