Stock of the week: Volkswagen

Summary:

• Volkswagen announced new global alliance

• The company will partner with US peer on development of vans and pickups

• Two companies will also jointly explore opportunities in EV segment

• Volkswagen plans to release at least 50 EV models by 2025

• Analysts remain optimistic about company’s future

• Volkswagen (VOW3.DE) stock broke above 50-session moving average and trades slightly below €150 handle

Car makers all around the world had a hard time last year as trade wars and concerns over the global economic slowdown spoiled sentiment towards the industry. Growing environmental damage awareness pressures regulators to favor electric vehicles. Surprisingly, Volkswagen, the company associated with the biggest emission scandal in history, seems to be a front runner to take the lead in the EV shift thanks to newly announced global alliance as well as its own ambitious plans.

Volkswagen was constantly increasing revenues throughout the past decade. However, significant drop in profit margin at the beginning of 2012 greatly reduced company’s profits. Slump in earnings in the fourth quarter of 2015 was a result of the Dieselgate outbreak. Source: Bloomberg, XTB Research

Volkswagen (VOW.DE) was in the center of one of the biggest corporate scandals earlier this decade. So-called “Dieselgate” affair surfaced in 2015 when the US Environmental Protection Agency raised concerns over the amount of toxic fumes emitted by Volkswagen cars. Automobile company initially rejected any accusations but admitted later on that software in its vehicles was programmed to cheat emission tests. News that as much as 11 million cars may be affected by illegal software triggered a wave of lawsuits causing Volkswagen to pay at least €27 billion in case-related costs up to date. However, the amount of money Volkswagen is obliged to pay to settle charges is diminishing each year. Right now it is expected that the company will have to pay additional €2 billion in 2019 and €1 billion in 2020. While no further expenses related to “Dieselgate” are expected it does not mean that things are as plain as they were pre-2015. Volkswagen’s image was severely damaged and looming global slowdown is denting enthusiasm in the automobile industry.

Volkswagen was the only major car maker not to experience vehicle sales drop in 2018. Source: Bloomberg, XTB Research

This is why Volkswagen decided to look for allies overseas. The company officially announced during 2019 Auto Show in Detroit that it is forming a global alliance with the US peer, Ford Motor. The focus of the cooperation will be on commercial vans and pickups. Both companies hope that joint efforts will allow them to achieve a manufacturing scale and provide cost efficiencies. The first vehicles developed jointly by two companies are said to leave factories in 2022 while earnings boosts coming along with the partnership should be visible in 2023. Both Volkswagen and Ford have strong light commercial vehicle and business pickup segments and teaming up in these area is likely to to forge a dominant force on the market. However, the biggest potential of this partnership lies elsewhere. Apart from developing vans and pickups together, the two companies will also explore opportunities of cooperating in the electric vehicles segment.

There is a strong seasonal pattern when it comes to capital expenditures within the car industry. Volkswagen, along with BMW, are among companies pulling out the biggest investment in the busiest quarters. Source: Bloomberg, XTB Research

While no plans to develop EVs together have been made so far, Volkswagen and Ford will exchange views on technology and think on how they could get an edge in this area. Such a move may help both companies meet their ambitious goals. Ford plans to spend as much as $11 billion in 2015-2022 on development of electric vehicles while Volkswagen plans to invest even €44 billion in the new technology by 2025. Ford aims to develop 40 EV models by 2022 while Volkswagen pursues a goal of having no less than 50 EV models in 2025. No other car maker has as ambitious plans as Volkswagen so far. Depending on the spectrum of cooperation with Ford Motor on EVs, significant cost synergies may occur. In case two companies decide to develop EV technologies jointly, savings could be spent on infrastructure. This would be especially pleasing for Volkswagen as it also plans to open 16 electric vehicle manufacturing plants by 2025 globally.

Recommendation data compiled by Bloomberg shows that analysts remain optimistic about Volkswagen. Over 80% of analysts recommends buying German car maker while just 9.7% suggest selling the stock. Average 12-month price target is €198.09, implying over 30% increase against market price. Source: Bloomberg

Progress in the electric vehicle segment became even more desired after the European authorities called for tougher emission regulations. Many industry members claim that reducing carbon dioxide emission by 35% during the next fifteen years as proposed is close to impossible. While the proposal is still under review it seems unlikely that any measure limiting emissions by less than 30% will be passed. Moreover, regulators are also considering penalizing automobile producers that do not manufacture a certain number of low- or zero-emission vehicles. Volkswagen decided not to waste time waiting for the regulation to be approved and started gearing for the revolution on the car market. The German company already announced that it will be investing $800 million in expanding production capacity and adjusting operations to producing EVs in its factory in Tennessee, United States. Additionally,  Hans Dieter Poetsch, Chairman of Volkswagen, said in a recent interview that the company will be investing in large-scale EV battery production facility once technology needed for such move is ready. It should be noted that it will take time for this advantages to monetize but for now Volkswagen seems to be best positioned ahead of the EV revolution due to its scale, new partnership with Ford Motor as well as the biggest cash pile out of the five biggest carmakers in the world. The view is also reflected in recommendations on analysts’ from various financial institutions.

Volkswagen (VOW3.DE) has been trading within a range for the past six months. However, the stock managed to break above the 50-session moving average (green line on the chart above) therefore a longer upward move may be looming. The €150 handle can be seen as the first resistance level to watch as it coincides more or less with the 200-session moving average (purple line). Source: xStation5