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About the company

Volkswagen shortened to VW, is a German automaker founded on May 28, 1937 by the German Labour Front and headquartered in Wolfsburg. It is the flagship marque of the Volkswagen Group and is the largest automaker worldwide.

Volkswagen Group sells passenger cars under the Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda and Volkswagen marques; motorcycles under the Ducati brand; and commercial vehicles under the marques MAN, Scania, and Volkswagen Commercial Vehicles.

Are the shares attractive?

Yes. We recently added Volkswagen to our equity list with a price target of €176 per share on the Preference shares with the ticker VOW3. VOW3 is a "preference" share class (slightly higher dividends, likely different voting rights although I can't find specifics).

Investment Thesis

Volkswagen shares had taken a beating following the emissions scandal in 2015 and since then, shares have modestly recovered when compared to where they were trading prior to the scandal.

We are of the view that the automotive market has further room to grow particularly due to increased demand from China. In the first two months of 2017, the Chinese car market grew at a rate of 7% year-on-year. Premium demand growth is outperforming the overall market by 2% and SUVs represent now over 40% of the total market. Incentives in March are still not showing major signs of deterioration supporting our positive stance on the sector.

Today, Volkswagen is trading on a forward P/E of 6.27x which is very cheap compared to other companies such as BMW and Daimler which are trading on a forward P/E of 8.30x and 8.54x respectively.

If the company trades on a P/E similar to that of its peers, the price target multiplied by 2017 earnings estimate would be €175.60 (8 x 21.95). On 2017 forecasted earnings (8 x 24.05), the price target would increase to €192.40.

Rationale for our Overweight Recommendation

We are overweight on Volkswagen with a price target of €176 per share for the following reasons:

  • Scandal behind us – The diesel scandal case is now behind us (although cash outflows will continue till 2020)
  • New models coming into the market in 2017 to help boost sales – VW expects to benefit from SUV launches like Atlas and Tiguan in NA, Tiguan, Teramont and Kodiaq in China. Other major launches include VW Polo (on MQB) and T-Roc crossover. Volkswagen also expect to reduce costs by reducing headcount
  • Improved margins going forward – VW is expecting positive volume/price/mix and at least positive net impact of cost savings and fixed costs. Cost savings is driven by actions at VW brand and incremental models on MQB platform
  • Dividends – expected to increase going forward (currently 1.5% expected to increase to 3.15% by 2018)
  • Trading at a discount – Shares are trading at a discount when compared to other brands such as BMW and Daimler which were not tainted with any issues so far

Outlook

Volkswagen should be a satellite in a portfolio. Margins, cash flow and profitability are expected to continue increasing in the coming years. Volkswagen should be added to a well-diversified portfolio.