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All’s Going Too Well At VW, So Let’s Worry About Succession

Profit Forecasts Shaved To Take Account Of Bad News
Audi Margin Forecasts Cut Too

Investment bankers have been driving the new Golf VII, and despite being impressed with the car and the promise of greater long-term profits for Volkswagen, they have found something to worry about; the leadership succession, and VW’s underperforming share price.

“Most of our discussions with investors reveal that despite VW’s unmatched execution track record, investor concerns regarding corporate governance and succession planning remain key reasons for VW’s under-valuation,” said Credit Suisse analyst Arndt Ellinghorst.

“The financial market respects the achievements of VW’s former CEO and current chairman Mr Piech (75 years). However, it is currently unclear how VW will manage transition towards the post-Piech era and how this could impact leadership and corporate culture, the two key ingredients for VW’s success,” Ellinghorst said.

Meanwhile other analysts were cutting back their estimates for VW’s profits, as European conditions continued to deteriorate.

“…. not even VW is immune to an increasingly tough operating environment. We cut estimates for 2013 and 2014 earnings per share by 10 to 15 per cent to reflect weaker demand across mass, premium and truck segments,” said Morgan Stanley analyst Stuart Pearson in a report headlined “Reality Creeps, Even for VW”.

VW’s operating profit in 2011 was €11.4 billion.

Citi Research is on the same wavelength.

“VW margins are currently near all-time highs as VW benefits from its China growth and high capacity utilisation. We believe these margins may fall on slowing China growth, on slower European demand, and on global price deterioration as all competitors become more price aggressive in weaker markets,” said Citi analyst Harald Hendrikse.

“…. we slightly reduce our underlying 2012-2014 EBIT (earnings before interest and tax) forecasts….” Hendrikse said.

VW’S new Golf, which may be manufactured in Mexico as well as China, is put together using a new system of modular components (so-called MQB) which analysts say could save up to €3,000 per car, if used across all of VW’s brands including its Seat, Skoda and Audi subsidiaries.

According to Morgan Stanley’s Pearson, even the mighty money making machine that is Audi, is finding its profit margins coming under pressure.

“We cut our volume and pricing assumptions across all of VW’s business lines. This primarily reflects weaker E.U demand, where we estimate VW still makes between 35 and 40 per cent of profit. We now assume Audi margins slip below 10 per cent from previous expectations from 2013 in line with our recent BMW and Daimler cuts, and that mass brand margins also decline in 2013 – despite tailwinds from lower MQB costs and incremental Golf savings,” Pearson said.

Neil Winton – October 14, 2012

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