The Week That Was: Automotive Stocks


This week we review the new developments at Volkswagen AG (OTCMKTS:VLKAY) and Tata Motors (NYSE:TTM). Volkswagen reached the record feat of 10.14 million vehicle deliveries in 2014, up 4.2% year-over-year. However, despite solid performances in China and Europe, what held-off Volkswagen from surpassing Toyota as the world’s largest automaker in terms of volumes were low commercial vehicle sales and low sales in the U.S.  Volkswagen’s own-branded passenger vehicle sales in the country declined 10% year-over-year in 2014, despite the strongest vehicle demand in the country since 2006. The company is now looking to launch a new model to ramp up sales, and is using its flexible modular architecture for the same. On the other hand, Tata Motors’ luxury vehicle division Jaguar Land Rover (JLR) is considering extending manufacturing in North America.

Volkswagen

Part of the problem for the Volkswagen-branded vehicles in the U.S. has been a weak SUV/crossover lineup, a segment which grew by 11.8% to 5.38 million units last year, forming approximately one-third of the net light-duty vehicle sales in the country. Volkswagen Passenger Vehicles presently sells only two SUVs in the U.S., the compact Tiguan and the upscale Touareg, and the total light truck sales for the brand fell nearly 18% in the U.S. last year to 33,185 units. In comparison, volume sales for Toyota and GM’s light truck lineups in the country rose 11.1% and 7.6% respectively.

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We have a $44 price estimate for Volkswagen AG, which is roughly 10% below the current market price. The stock has declined 0.9% in the last week.

See Our Complete Analysis For Volkswagen AG

Volkswagen’s new compact multi-purpose vehicle Touran will make its debut this year at the Geneva Motor Show, and is expected to be launched next year. The company will hope that the new model has an immediate impact on sales, especially in the U.S. What’s also noteworthy is that the Touran is being built on the Modular Transverse Toolkit (MQB), the company’s new and flexible vehicle assembly platform with weigh-saving advantages. The model joins the Golf, Passat, Audi A3, Seat Leon, and Skoda Octavia on the MQB platform, a single, more flexible platform to produce vehicles for all the brands across Volkswagen’s portfolio, limiting extra assembly costs. The start-up costs for MQB run high, but in the long run, this extremely flexible vehicle architecture is capable of bringing down manufacturing costs significantly. Going forward, increasing implementation of MQB will also allow Volkswagen to reduce development costs, start-up costs, and assembly costs associated with setting-up production of a new model.

Tata Motors

Jaguar Land Rover has been struggling in the U.S., with sales dropping 5.5% year-over-year in the last seven months. The automaker is now looking to expand its production footprint, and might take its new planned facility to North America. JLR has already announced plans to increase capital expenditure in the next fiscal year (starting April 2015) to £3.6-3.8 billion ($5.5-5.8 billion), spending more in a bid to augment its current volume sales by building more manufacturing facilities closer to the end customer and in low-cost countries. The company will begin local production in its single largest market, China, in the ongoing quarter, and has started building its first fully-owned manufacturing facility outside the U.K., in Brazil.

Trefis’ price estimate for Tata Motors is $50, which is around 3% above the current market price. The stock has grown only 0.6% in the last week.

See Our Complete Analysis For Tata Motors

Local production will help the automaker feed local demand at competitive prices and also help evade supply constraints that limit the sale of JLR vehicles. The company aims to build three models in the China plant, in partnership with the Chery Automobile Company, with an initial annual production capacity of around 130,000 vehicles, by 2016. On the other hand, the $290 million (750 million Reals) Brazil plant in Itatiaia, near Rio de Janeiro, will employ 400 employees, include an education and business center, and have an annual production capacity of 24,000 vehicles. Building a local plant in North America, perhaps in Mexico, could be cost-effective for JLR, and also help the British marquee meet luxury vehicle demand in North America at competitive prices.

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