Will The New Covid-19 Strain Affect Volkswagen’s Stock?

[Updated 12/30/2020] Volkswagen Update

Having gained more than 87% from March lows, Volkswagen AG’s stock (OTCMKTS:VWAGY)  has reached its near term potential, primary due to the concerns over the new strain of Covid-19 in its primary market (Europe). VWAGY’s stock has rallied from $11 to $21 from March 23rd, compared to the S&P 500 which moved 67% in the same period. The company has seen a steady revenue growth over recent years, and its P/E multiple has fallen slightly. We believe the stock, after the recent rally, is at its near term potential. Our dashboard ‘Buy or Sell Volkswagen’s Stock‘ has the underlying numbers.

Due to the Covid-19 crisis, Volkswagen saw its revenue fall by 15% in the first 3 quarters of 2020 primarily due to lower consumption and consumer spending. In Q3 2020, Volkswagen saw some recovery as revenue was recorded at €59 billion, down 3% y-o-y and earnings recorded at €5.15 compared to €7.56 in the same period of the previous year. The fall in EPS was due to higher operational expenses during the pandemic. Further, the company reported €13 billion in cash inflows from operating activities for the first nine months.

We expect Volkswagen’s revenues to fall by more than 10% to €226.1 billion in 2020. Further, its net income is likely to fall to €7.2 billion. Thereafter, revenues are expected to grow further to remain nearly flat while the EPS figure is likely to be around €0.84, which coupled with the P/E multiple of around 24x and an exchange rate of $1.11 per €, will lead to Volkswagen’s valuation to $22, in line with the current market price.

[Updated 07/24/2020] Volkswagen Stock Expensive at $17?

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.

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.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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