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New Models, End Of Takeovers, Clear Way For VW Profit Growth

Investors Have Waited Three Years For Earnings Acceleration.

“On the car side we think more M&A is unlikely, especially as Alfa-Romeo plays a central role in Fiat’s future planning,”

With the Scania truck takeover done and dusted, Volkswagen investors now see the way clear for an extended period of profit improvement as new models multiply, and with little chance of management distraction from more unwanted takeover bids.

Only the remote possibility that perhaps VW might finally seek to buy Fiat’s Alfa Romeo is a negative at the back of investor’s minds.

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 Commerzbank analyst Daniel Schwarz, average expectations for VW’s earnings before interest and taxes (EBIT) for 2014 have dropped to €12.7 billion from €17 billion.

But things are looking up.

“The mass market brands in particular are far away from peak margins and earnings momentum should now accelerate,” Schwarz said in a report in which he rates VW as a “buy”.

International Strategy and Investment (ISI) is also warming to VW, but can’t bring itself to recommend buying the shares. Its recommendation was raised to “neutral” from “cautious”.

ISI said it is restrained because it reckons VW and Audi have the oldest fleet of models compared with German premium and European mass market competitors, still has high fixed costs from depreciation, R&D and labour, and increasing cost of sales.

ISI said for three years in a row, investors expected VW earnings to accelerate, but each time this failed to happen, but with improved product momentum, this will happen in 2015.

Key new products
“When looking at VW it is clear that the company stands to benefit over the next 18 months from the introduction of key new products. These include VW’s new Passat and Touran, Audi’s A4 and Q7, and the recently launched Porsche Macan,” ISI said.

“VW/Audi’s fleets are significantly older today than those of peers and will remain so in 2015. Indeed, VW brand will not see a significant improvement in its fleet age until 2016 when additional products, such as the Polo, arrive,” ISI said.

Commerzbank’s Schwarz wondered if what he called VW’s “shopping tour”, which included buying Porsche, MAN and Scania trucks, and Ducati motor bikes, had ended.

M&A unlikely
“On the car side we think more M&A (mergers and acquisitions) is unlikely, especially as Alfa-Romeo plays a central role in Fiat’s future planning,” Schwarz said.

Volkswagen board chairman Ferdinand Piech has often hinted in the past that he might be interested in buying Alfa Romeo.

“For the time being, we believe larger transactions are unlikely and management’s focus is on mass brands’ profitability, MAN/Scania and reaching 2018 targets,” he said.

VW has a target of 10 million sales by 2018, but might well reach that this year.

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