Earnings Will Be Boosted By MQB, Although This Poses Risks.
Volkswagen’s profit margin will rebound to 6.5 per cent in 2016, after weakening this year because of tough conditions including poor European pricing.
That’s the verdict of U.S. ratings company Fitch, which raised its investment rating on VW.
Fitch said VW’s bottom line will be boosted by its new production strategy, known as MQB. But it worries that although MQB cuts costs, it also poses a threat because any problem with a component could lead to a massive, global recall.
“The upgrade reflects VW’s resilient performance in a currently highly adverse and competitive automotive environment and comfortable financial headroom in its ratings. Earnings declined slightly in 2013 and are likely to erode further in 2014, but we expect a recovery in 2015 as benefits from the group’s new platform increase and the product portfolio strengthens further. Recent acquisitions have moderately weakened some of VW’s key credit metrics but the financial profile remains strong,” Fitch said.
Profit rebound
VW’s operating profit margin declined to 5.9 per cent in 2013, from six per cent in 2012 and 7.1 per cent in 2011, according to Fitch, excluding what it called “robust double-digit” margins from China.
“Fitch expects profitability to erode further in 2014 from weak pricing in Europe and weakening sales in other regions, but we expect operating margins to rebound to more than 6.5 per cent by 2016. Fitch expects the new modular transverse toolkit (MQB) platform strategy to generate substantial time and cost savings in development, purchases and production. However, it poses the risk of a flaw or quality issue with that platform which could have major repercussions,” Fitch said.
In the first quarter of 2014, VW’s operating profit, or earnings before interest and taxes (EBIT), rose 22 per cent compared with the same period in 2013 to €2.86 billion. Revenues rose nearly three per cent to €47.8 billion.
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