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Mueller Steers VW Towards Higher Profits, Less Grandstanding

Mueller Steers VW Towards Higher Profits, Less Grandstanding.

New CEO Seeks To Reassure Investors About “Dieselgate” Impact.
Is China Going To Be A Bigger Problem?

“However uncertainty remains high and we cannot rule out further setbacks”

Volkswagen first quarterly loss in 15 years scared investors but attempts by new CEO Matthias Mueller to show that the “dieselgate” crisis was under control went some way to relieve worries.

Mueller, at a press conference in Wolfsburg, said profits not sales are the new watchword, a mantra which will please investors, although past experience warns that actions speak louder than words.

“A lot has become secondary to going higher, faster, further, especially return on sales,” Mueller said in a statement.

“It is not about selling 100,000 cars more or less than a big competitor. It is rather about qualitative growth,” Mueller said.

Volkswagen has increased sales by more than 30 per cent in five years while profits have remained relatively flat. Before “dieselgate”, VW was relentlessly pursuing its ambition of overtaking General Motors and Toyota to be number one in the world in terms of sales by 2018. Mueller said VW will present a new 2025 plan by the middle of next year, while the 2018 goals remain in place. Those plans also included a VW group pre-tax profit target of least eight per cent, and six per cent for its own troubled VW name-sake brand.

The meeting was also told that the crisis hadn’t impacted VW sales yet in Europe.

VW announced a loss of €3.48 billion in the third quarter compared with a €3.23 billion profit in the same period last year. “Dieselgate” provisions were raised a bit to €6.7 billion, up from VW’s originally predicted €6.5 billion. 2015’s operating group profit will be “significantly below” last year’s because of costs related to “dieselgate”.

Commerzbank analyst Sascha Gommel was reassured by Mueller, but still worried about VW’s future.

No visible impact
“So far, there is no visible impact on VW’s operating business from the diesel scandal, according to management. In sum, we believe the stock (price) discounts a very negative scenario and we think it offers significant value. However uncertainty remains high and we cannot rule out further setbacks. We are reviewing our estimates, target (share) price and rating,” Gommel said.

Adam Hull, analyst with Berenberg Bank liked Mueller’s remarks on the need to improve labour productivity.

“The CEO said VW needs to be leaner, more decentralised and to speed up decision-making. There will be fewer board members and the viability of all models will be re-examined. He said that while scale is important, he seeks “qualitative growth”,” Hull said in a report.

Morgan Stanley analyst Harald Hendrikse thought VW’s future still looked murky.

“We think it is too early to take a valuation view on a company with so much uncertainty surrounding the outlook,” Hendrikse said.

Max Warburton, analyst at Bernstein Research, wasn’t impressed.

“There’s nothing new on the real extent of the problem, nothing new on likely actions and nothing new on likely costs,” Warburton said.

The lack of new information could have been because VW was deliberately keeping quiet until it has agreed a plan with regulators in the U.S. and Europe.

“A harsher interpretation would be that VW still doesn’t seem to understand the magnitude of its problems, still doesn’t have a clear idea of how to fix them and is slightly in “denial” about it all,” Warburton said.

Good case
But Warburton said despite all this, VW’s long-run earnings power won’t be significantly impacted by the diesel crisis, and because the shares have taken such a big hit, they still presented a good case for buying.

VW’s stock market capitalisation has been slashed by about €21 billion since the crisis hit last month.

The Financial Times Lex column thought investors were missing the point, which it said was China.

In a column headed “The emissions scandal is in the price. Is China?”, Lex pointed out that China sales fell eight per cent in the third quarter, where it has a higher proportion, one third, of its business than any other western manufacturer.

“Whether the Chinese consumer will continue to bear up as the country’s overall economy weakens is a matter of debate. The lowest consumer confidence reading in eight years is not a good portent. If the China market continues to soften, Volkswagen’s (stock price) discount will be more than justified,” Lex said.

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