The Year That Was: Volkswagen


When it rains, it pours. Volkswagen AG (OTCMKTS:VLKAY) was already struggling with its sales volume performance in the U.S. and low operating margins going into 2015, and things took a turn for the worse when the emissions scandal broke into the news in September last year. The German giant had a good 2014, where vehicle deliveries to customers surpassed the elusive 10 million mark. However, sales volume declined 2% year-over-year in 2015, as slowing sales in China, hurt by the tepid economic conditions in the country, and Volkswagen’s inability to make the most of the high demand for SUVs and Crossovers cost the company market share in almost all crucial markets. To make matters worse, the dieselgate scandal, wherein Volkswagen seems guilty of falsifying emission test results on around 11 million cars worldwide, is bound to cost tens of billions in fines, settlements, recall expenses, and future losses in sales.

We have a $31 price estimate for Volkswagen, which is above the current market price.

See Our Complete Analysis For Volkswagen AG

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

 

Suffice to say that it has been a year to forget for Volkswagen. The stock is down 33% in the last 52 weeks, which includes the precipitous fall of ~40% within days of the revelation that the German company had fitted some of its diesel vehicles with a software or a ‘defeat device’ that kept emissions within the permissible limit when the vehicle was being tested. Volkswagen faces tens of billions in government fines and settlements, private settlements, recall expense, and future loss of sales, and we estimate that these costs could run up to $34.5 billion. Late last year, the company announced that another 800,000 vehicles have ‘implausible’ CO2 ratings. However, further investigation revealed that this impacted only 36,000 of the cars it produces each year.

Volkswagen has had to go back to the drawing board in the last year to figure out the fixes, not only in relation to the emissions scandal, but also at the grass-roots level. Well before the massive dieselgate scandal broke out, Volkswagen’s operating structure had come into question. The German group employs roughly 600,000 people and has 119 factories around the world, comprises 12 separate brands, ranging from mass market cars to luxury vehicles to commercial vehicles. The group’s chief rival Toyota, on the other hand, employs only around 330,000 people, delivering a comparable number of vehicles worldwide. Volkswagen’s near 6% operating margin is well below Toyota’s 10-11% operating margin. The group needs a structural upheaval, one would think.

Immediate and long-term fixes are the need of the hour. The immediate fixes include a €1 billion cut in planned investments in property, plant, and equipment, investment property, and intangible assets, excluding capitalized development costs, for 2016. The figure is now expected to be approximately €12 billion ($13 billion), which, although, is still quite sizable, gives the group more leeway to tackle the extra costs brought on due to the scandal. In addition, the group is cutting investment by €1 billion ($1.08 billion) a year at its namesake brand, which contributes ~60% of the net volumes, and is weighing down the group’s net profitability, as high capital spending and R&D investments have kept operating margins below 3% at the brand. Through the first nine months of the year, capex stood at €7.34 billion, representing 5.3% of the sales revenue for the automotive division, whereas the figure stood at 5% last year.

For the long term, the new CEO Matthias Mueller chalked out a five-point plan to realign the group, which includes tasks related to the emissions scandal such as customer support and investigation, and also plans to pursue major structural changes. Volkswagen has transformed its Strategy 2018 into Strategy 2025, the details of which will be developed over the next few months. The group is looking to take a step back from its previous aggressive pursuit of expansion, and realign its strategy and targets, in a bid to realize more qualitative growth, and not just quantitative growth. The company is also emphasizing more on the development of new energy vehicles. Volkswagen brand’s focus is on building plug-in hybrid electric vehicles with greater range, high-volume electric vehicles with a radius of up to 300 kilometers, a 48-volt power supply system (mild hybrid), as well as ever more efficient diesel, petrol, and CNG concepts.

One could say that Volkswagen is now in transition. From a large group known for its large investments and expenditure in R&D, the group will now have to cutback and regroup to absorb the scandal and its repercussions. Revenues through the first nine months were up 8.5% year-over-year, carrying the positive effects of currency translations and product mix. However, the €6.70 billion ($7.24 billion) that the group set aside in its Q3 financial statements to cover recall related expenses led to Volkswagen’s first net loss in 15 years. More recently, the EPA and California Air Resources Board (CARB) have jointly rejected the automaker’s December recall proposal for 2-liter diesel cars in the U.S. effected by the defeat device. Going into 2016, Volkswagen is already struggling due to poor sales in markets such as China and the U.S., where its sales volumes slid 3.4% and rose only 1.2%, respectively, last year, and it could be tough to ramp up sales, especially on the back of the emissions scandal. In addition, the aftermath of the scandal will weigh on the company’s operating performance. One can expect a couple of years or more before Volkswagen’s efforts to boost volumes, cut costs, and gain back customer trust, materialize.

See the links below for more information and analysis:

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research