VW Expected To Beat 2010’s Impressive Performance This Year

“we believe VW will again be in the position to increase earnings and maintain its competitive lead”

Just because Volkswagen raised its profits sevenfold in 2010, don’t think it can avoid criticism from the naysayers.

VW’s net income surged to €6.84 billion last year, up from €960 million in 2009, and it expects to exceed 2010’s operating profit-record of €7.14 billion in 2011. A massive increase in sales in China in 2010 – up 37 per cent to 1.92 million cars – helped the bottom line too.

But Citigroup Global Markets autos analyst John Lawson, while applauding VW’s strong performance last year and particularly in the final quarter, worried about what he called an unexpectedly large working capital swing in the fourth quarter – “or even a quality glitch in the figures” – as net industrial cash retreated by €1 billion in the final three months.

Describing this as an “unusual feature” in recent VW reports, Lawson said the company would likely be given the benefit of any doubts, as VW’s improving cost structure was improving with the modular programme.

“Cash matters for this company, as completion of the Porsche transaction will trim the €19 billion cash pile by an estimated €10 billion whichever way it is completed, while further demands on its balance sheet could follow from the completion of VW’s truck strategy,” Lawson said.

(CEO Martin Winterkorn said in early March that VW is totally committed to the merger with Porsche. “However the tax and legal hurdles still to be overcome on the way are not insubstantial,” he said.)

Deutsche Bank analyst Gaetan Toulemonde also expressed some concern about slightly negative free cash flow, which was probably down to strongly negative working capital because of rising stocks. Despite some looming negatives, Toulemonde was upbeat on VW’s prospects.

Competitive lead
“We are conscious of headwinds in the current year, which will curb operational gearing such as raw material headwinds but we believe VW will again be in the position to increase earnings and maintain its competitive lead,” Toulemonde said.

Bernstein Research analyst Max Warburton worried about the prospects for auto manufacturers generally, as basic factors conspired

to undermine prospects.

“In a period where oil is going up, the Euro is going up and interest rates are probably going up, we likely have to accept that auto company share prices won’t go up. Any of these moves alone could be called a “sell” signal for the sector. To get all three at once is pretty ugly,” Warburton said.

Commerzbank auto analyst Daniel Schwarz was impressed with VW’s 2010 and upbeat about 2011.

“In 2012, VW will benefit from a favourable geographic mix and a strong product pipeline. Management indicated that the start to the year was strong. We increase our 2011 and 2012 estimates,” said Schwarz.

For 2011, Schwarz estimates VW EBIT (earnings before interest and tax) will rise to a fraction under €8 billion, and on to €8.35 billion in 2011, which represents a margin of 6.3 per cent. He recommends investors buy VW shares.

Buy. Don’t buy
Citigroup’s Lawson isn’t so enthusiastic, and no longer recommends investors buy into VW.

“We are wary of risks which might present from the remaining exposure to Europe’s volume car business in a price-challenged 2011. We also see significant further calls on VW’s net liquidity, not just in the remaining stages of the €15 billion Porsche transaction, but also if the truck strategy is pursued to its logical conclusion. This could result in a further cash outflow in VW or its subsidiaries, and at worst could even risk an equity call,” Lawson said.