VW Persuades Investors The Rally From Dieselgate Has Begun.
VW Brand Profit Margin Remains A Pressing Problem.
Most Volkswagen investors were impressed with details of second quarter results which they believe showed the company was making progress after the shock of dieselgate.
Most VW investors; not all.
Volkswagen announced first half operating profit at its core namesake auto brand dived more than a third to €900 million euros bringing the profit margin down to 2.9 per cent in the second quarter from 3.3 per cent in the same period last year. This looks better though when you remember the margin in the first quarter was only 0.3 per cent. VW explained that the VW brand, with €1.5 billion euros, bore the brunt of €2.2 billion of additional provisions to cover the cost of the dieselgate scandal.
In an unscheduled announcement earlier, Volkswagen said overall operating profits before special provisions in the first half would reach €7.5 billion, up from analyst’s expectations of €6.5 billion, thanks to better-than-expected VW brand car sales. Last year, VW lost €1.6 billion, its worst ever financial performance, largely because of the dieselgate scandal.
VW reiterated its forecast for the year that its overall operating margin will be between 5 and 6 per cent, compared with 6 per cent in 2015. It said sales for 2016 will fall by up to 5 per cent compared with the previous year.
Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen said profitability problems at the VW core brand need to be fixed.
“The profit at VW brand is very small. If you calculate the profit per car it is very small – about €360 to €370, and poor compared with the competition from Ford and Peugeot-Citroen. I think VW has stabilized the position but they have to get to work on VW brand and cut costs,” Dudenhoeffer said.
Commerzbank analyst Sascha Gommel agreed about the VW brand problem.
“The second quarter results are pretty good, but if you compare the VW brand margin to direct competitors, there’s still quite a gap,” Gommel said.
In a report published a day later after the dust had settled a bit, Gommel was less enthusiastic.
“When we read the press release of the results we gained the impression that there had been a massive jump of profitability at VW brand. While the margin improvement from 0.3 per cent in the first quarter to 2.9 per cent in the second is quite an achievement, we had the impression that there had been much higher expectations in the market,” Gommel said.
Gommel said the details are slightly less impressive. R&D capitalisation rose to 40.6 per cent in the quarter from 37.4 per cent in the first period, while production exceeded sales by roughly 100,000 in the second quarter.
“While Q2 is always one of the strongest quarters, we believe there will be a slight reversal in H2,” Gommel said.
Investment researcher Evercore ISI’s initial reaction was that VW’s figures revealed no major surprises.
“As expected cash flow was solid thanks to China dividends leaving net cash at a healthy €29 billion. Q2 was reasonably good but management needs to show more progress on the turnaround,” Evercore ISI’s Arndt Ellinghorst said.
Barclays Equity Research thought the VW turnaround was underway.
“We believe there is finally potential for VW to become an earnings growth story on the back of its “self-help”,” said Barclays’ analyst Kristina Church.
“The VW brand margin may prove the start of this delivery, despite continuing “difficult conditions” and the market might start to move away from the negative headlines related to diesel and start looking at the fundamentals again,” Church said.
VW could become investable again if management can maintain the momentum and prove that there are really big structural changes happening, Church said.
CAR’s Dudenhoeffer agreed that VW was on the way to recovery.
“VW has shown a big turnaround in management style and made some important decisions for the future with its plans for electric cars, autonomous cars and the sharing economy,” he said.
Analysts are now awaiting details of the VW brand restructuring plan and its financial milestones expected to be announced between September and November. Negotiations are continuing with labour union.
VW shareholders have been on the wrack since the news broke September 18 that the company cheated to defeat U.S. environmental rules which limited noxious emissions from diesel engines. This concerned around 500,000 diesel engines in the U.S. The scandal then moved on to the rest of the world with 11 million engines involved in cheating not only diesel emissions, but also fuel economy claims.
VW has announced preliminary court approval of a $15.3 billion dieselgate compensation settlement in the U.S. VW has set aside an additional €2.5 billion to cover the costs of dieselgate, and the total now stands at €18.4 billion. Some estimates of the final cost have soared past the previous record for environmental penalties held by BP with $53.8 billion for the Deepwater Horizon oil spill.