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VW Boost Profits Again But “Fails” To Surprise

Modular Success Expected To Trickle Down From Audi To Mass Brands
Significantly Higher Profits Expected In 2011

It’s a mark of Volkswagen’s huge success, that even when it matches what investors expect, that is somehow not enough.

“Results in line with expectations disappointed the market,” said Commerzbank.

 VW has surprised investors with good news so often, that even when it does what it says on the tin, that is seen as bad news.

In the event, VW’s net profit in the second quarter jumped to €4.67  billion from €1.25 billion in the same period of 2010.

Commerzbank auto analyst Daniel Schwarz took comfort from Audi’s dynamic 12.9 per cent EBIT (earnings before interest and tax) profit margin saying that this was a direct result of VW’s modular production strategy, which would trickle down to benefit mass market cars too.

“We believe this cost advantage versus BMW and Mercedes is very much sustainable. More important though, it provides a good insight in the incremental costs-savings potential from a higher degree of modularization. (this) toolbox for smaller cars provides significant incremental cost-savings potential to the much larger part of VW’s portfolio, phasing in by 2012 and beyond. Therefore, we find Audi’s performance versus Mercedes and BMW a positive indication for the margin potential of VW brand, SEAT and Skoda in coming years,” Schwarz said.

Match consensus
Schwarz raised his EBIT forecast to €11.1 billion for all of 2011 from a previous prediction of €9.6 billion, which matches investors’ consensus.

There weren’t many negative appraisals of VW’s prospects around, although Max Warburton of Bernstein Research managed to nearly produce one.

“VW is indisputably a powerhouse and looks well placed to remain very profitable in the second half and beyond as today’s bullish outlook statement emphasizes. VW’s exposure to mass market China and Brazil makes it less attractive than pure premium plans in our view – we see a risk of mass market profitability cracking in those regions going forward, but Audi, Porsche and trucks certainly look well positioned to support overall earnings,” Warburton said.

J.P.Morgan auto analyst Ranjit Unnithan summed up the overwhelmingly positive outlook for VW like this.

“The outlook wording (from VW) has been revised to state “significantly” higher operating profit this year versus the previous state of just “higher”,” Unnithan said.


Neil Winton – August 1, 2011

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