By Volkswagen, a leading global auto maker, is making strides in the electric vehicle (EV) market. While its plans to sell more EVs in the United States seem promising, investors should take a closer look at the company’s stock valuation.
The Valuation Conundrum
Volkswagen appears surprisingly undervalued compared to its counterparts. In 2023, the company sold 9.2 million cars, yet its market capitalization is only around $63 billion. On the other hand, Toyota Motor sold approximately 10 million cars and boasts a market capitalization of around $260 billion, as reported by FactSet.
Interestingly, this valuation conundrum goes beyond sales figures. Volkswagen holds around $50 billion more in cash than its total debt, including adjustments related to leasing operations. Furthermore, the company has a substantial 75% stake in Porsche’s stock, which is currently valued at $55 billion. When considering cash reserves and Porsche shares, Volkswagen’s stock value is approximately negative $40 billion.
The Puzzle Continues
This contradictory valuation raises questions. “Why is our stock trading like that?” wonders Volkswagen Chief Financial Officer Arno Antlitz. It is possible that depressed valuations of peer companies in Europe contribute to this situation. “First and foremost, this applies to some companies in Europe,” notes Antlitz.
Indeed, Stellantis, with a market capitalization of roughly $63 billion, has a net value closer to $30 billion when factoring in cash and leasing operations. Consequently, Stellantis’ shares are priced at around 2 times the estimated earnings for 2024. Similarly, BMW shares trade at about 3 times earnings, while Ford Motor and Toyota shares trade at around 4 times earnings, after adjustments. General Motors (GM) shares have a similar valuation at roughly 3 times earnings. However, Volkswagen’s shares are currently valued at negative 3 times earnings.
Tackling Complexity
The complexity of Volkswagen’s operations could be another factor contributing to its undervaluation. With a portfolio of various brands including Porsche, Audi, Skoda, Lamborghini, and Bentley, as well as an EV-battery company named PowerCo, the company’s structure may be difficult for investors to navigate.
Antlitz is actively addressing this complexity. “We are open to bringing in external investors for PowerCo,” he states. He also mentions the possibility of a PowerCo initial public offering in the future, similar to what Volkswagen did with Porsche in 2022.
In conclusion, Volkswagen’s undervaluation in the stock market raises questions about the company’s true worth. With a strategic focus on reducing complexity and potential plans for PowerCo, it will be interesting to see how Volkswagen’s stock valuation evolves in the coming years.
Introduction
The Porsche IPO may not have fully resolved Volkswagen’s valuation issues, but it did provide value to its shareholders. In the form of special dividends, VW paid out approximately €19 ($20.66) per share.
Volkswagen’s Dividend Strategy
Volkswagen prefers to distribute variable dividends on an annual basis as its primary method of returning capital to shareholders. The company aims to distribute around 30% of its total profits. Over the last decade, Volkswagen has paid out an impressive €35 billion ($38 billion), which accounts for approximately 31% of its total profits.
Shift in Investor Focus
At some point, investors need to shift their focus away from Volkswagen’s valuation and consider other aspects. Determining the company’s valuation is a complex task. Therefore, alternative questions need to be explored. For instance, investors should ask whether Volkswagen will be able to execute its electrification strategy as planned.
Positive Outlook for Electrification Strategy
According to recent data, Volkswagen is on the right track with its electrification strategy. Battery electric vehicle (BEV) sales have surpassed 770,000 units in 2023, experiencing a year-over-year increase of about 35%. BEVs now account for nearly 11% of total car sales, up from approximately 10% in 2022.
In the U.S., VW BEV sales have surged by approximately 60%, reaching around 70,000 units. In 2023, five models sold over 5,000 units each, compared to three models in the previous year.
Future Growth and Expansion
Volkswagen expects continued growth in BEV sales as more models are introduced. At present, only a limited number of segments have been electrified. However, numerous models are set to launch, such as the ID Bus, ID.7, and Q6 E-Tron. Furthermore, Volkswagen plans to offer EVs priced below $35,000 in the near future.
Addressing Profit Concerns
The success of EVs may explain the concerns surrounding Volkswagen’s valuation. Some investors worry that BEVs might not be as profitable as traditional cars. However, Volkswagen remains confident about their profitability. The company is aiming for “margin parity” on select EV models by 2025, targeting operating-profit margins of 7% to 8%. Lower battery costs and increased manufacturing scale are crucial factors in achieving this goal.
Conclusion
BEV profits have the potential to address Volkswagen’s current valuation challenges. Previous attempts have not yielded the desired results. As Volkswagen continues to focus on its electrification strategy, investors should recognize the potential opportunities and long-term profitability that lie ahead.
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