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Volkswagen’s Higher Profits Fail To Impress Stock Market

Volkswagen’s Higher Profits Fail To Impress Stock Market.

“Skoda and SEAT brands reported strong profit performances, while Porsche stood out with an 18.6% profit margin, up from 16.8%”

Volkswagen’s third quarter profits report didn’t impress the stock market and the shares dived initially on the Frankfurt exchange close to half a percent before recovering a bit.

Volkswagen’s operating profit in the third quarter rose to 3.75 billion euros ($4.1 billion) from 3.2 billion ($3.5 billion) in the same period last year with the 2015 announcement coming about a month after the dieselgate scandal broke.

Commerzbank Equity Research described the results as unexciting and solid and said the improvement in profit “overstates the quarter as quality of the beat is low”.

The latest operating profit was at the high end of analyst’s estimates.

Investment researcher Evercore ISI liked the performance.

Middle of a turnaround
“Bearing in mind that the Group is still in the middle of a turnaround and foreign exchange was still a drag this is a very strong result and solid cash generation,” Evercore ISI analyst Arndt Ellinghorst said in an initial report.

VW’s Skoda and SEAT brands reported strong profit performances, while Porsche stood out with an 18.6% profit margin, up from 16.8% in the previous quarter.

The troubled VW brand managed a meagre 1.5% margin.

VW’s share price has been relatively steady over the past month, and shareholders didn’t run for the exits when U.S. authorities approved a $14.7 billion settlement concerning 475,000 diesel vehicles which had been cheating emissions regulations.

Ellinghorst is now looking at some important upcoming developments which will show if VW has the ability to address its underlying problem of shareholder-unfriendly governance, and strong trade unions.

“It is unquestionable that VW has manouvered itself into a cost and complexity situation that needs to be solved in order to claim a leading position amongst leading (manufacturers).  What is momentarily debated amongst investors is whether management is sufficiently committed and has the freedom to address the necessary changes. The coming weeks will tell whether VW continues to be handcuffed by the influence of its workers council/Union. This would certainly frighten investors and bring us back to the discussion of VW’s corporate governance and imbalances on its supervisory board as a result of special rights granted to the State of Lower Saxony,” Ellinghorst said.

Not crucial
Barclays Equity Research analyst Kristina Church said VW’s quarterly results aren’t likely to be crucial for the stock price given the huge ongoing damage from dieselgate. Church agreed that the cost negotiations with unions were important, and was positive about VW’s prospects.

“We continue to see a huge amount of potential for improvement at VW, largely to come as a result of cost-savings which we believe are not fully anticipated by the market but do not expect it to be a linear progression, given the huge levels of uncertainty still surrounding legal issues and cost negotiations,” Church said.

The engineering workers union controls half the votes on the ruling 20-seat supervisory board. The union-friendly German state of Lower Saxony has two seats on the board too.

In a recent report, the Center for Automotive Research (CAR) at the University of Duisburg-Essen underlined the VW brand’s chronic unprofitability. Last year it said Toyota’s auto division reported profits almost three times bigger.

VW looks bad compared with GM too, which produced 46 cars per employee in 2015 compared with 17 at Volkswagen. GM, with 215,000 employees, produced almost as many cars as VW with 600,000 employees.

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