After a 57% rise since the March 23 low of this year, at the current price of around $17 per share, we believe Volkswagen AG’s stock (OTCMKTS:VWAGY) does not have much upside left. Volkswagen’s stock has increased from $11 to $17 off the recent bottom, better than the S&P which increased by around 45%. The rise in the stock price was primarily helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The automobile sector in the near term is facing an uncertainty on account of weaker demand, potential supply constraints, and a reduction in discretionary spending. This would restrict any upside in the stock until there is some clarity with regards to the abatement of the virus.
The stock currently is 16% below the levels at which it was at the end of 2017 and it is still below the pre-Covid (February 2020) high of $19. We believe that the company’s stock doesn’t have upside in the near term, driven by the outlook for a revenue fall and margin shrinkage. Our dashboard ‘What Factors Drove -14% Change In Volkswagen Stock Between 2017 And Now?‘ has the underlying numbers.
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Some of the stock price fall in the 2017-2019 period was offset by the 8% growth in revenues. Volkswagen’s revenues increased from $261 billion in 2017 to $281 billion in 2019, primarily by the contribution from the Volkswagen Passenger segment while Skoda recorded the highest growth. The company also saw a 13% increase in Net Income as net income margin improved from 5% in 2017 to 5.3% in 2019.
The stock price fell during this period as the P/E multiple fell from 8x in 2017 to 7x in 2019. The P/E is down to about 6x now, given the volatility of the current situation.
Effect of Coronavirus
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Volkswagen’s stock is down by about 7% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index has been flat. Due to the coronavirus pandemic the company saw a 14% fall in Total revenues for Q1 2020 with the drop seen across segments. Further, lower consumer spending and consumption over the coming months could likely lead to lower demand for automobiles as consumers will focus more on essential spending.
In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results.
Gradual opening of lockdown, has helped Volskwagen’s P/E multiple to recover to 6x currently but we don’t expect any further improvement. As per Volkswagen valuation by Trefis, VWAGY’s fair price estimate comes to $17.
While Volkswagen doesn’t have much upside in the near term for potential investors, could investing in debt-laden, down-but-not-out companies yield large upside post-Covid? Find out more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.