VW Profit Accelerates, But Doubts Over Union Power Remain.
“We remain unconvinced that the leopard has change is spots – in fact we’re not really clear who is in control of the company, how focussed management members are on the day job and how much hunger there is to lift the company’s performance,”
Volkswagen, struggling to emerge from the financially debilitating “dieselgate” scandal and the longer-running controversy over its politicized governance, has convinced many investors that it has finally turned the corner.
Many investors; but not all.
Volkswagen, Europe’s biggest car maker in terms of sales, confirmed Wednesday its first quarter operating profit accelerated to 4.4 billion euros ($4.8 billion). It had been forced to reveal these numbers a couple of weeks earlier by German regulators concerned that the company had performed better than its earlier profit growth guidance.
Coupled with a decision by Volkswagen to change the way it works out its own brand VW’s profit margins, investors had begun to get excited that the long awaited renaissance had begun. This inspired investor reports with euphoric headlines like “Let There Be Light”, by investment bank Jefferies. Before the margin manipulation news, investment researcher Evercore ISI, long a proponent of VW’s huge profit potential simply because it had long wallowed in chronic inefficiencies, declared “The Beast Awakens”.
Toyota of Japan sells roughly the same amount of vehicles globally with a workforce half the size of VW’s. Investors reckon this happens because the engineering workers union thwarts reform by controlling half the votes on the ruling 20-seat supervisory board. The German state of Lower Saxony has two seats on the board too. This has led to a chronic lack of profitability compared with companies like Toyota, they say.
And despite promising recent financial news inspiring investor interest, Bernstein Research still thinks Volkswagen has a lot of work to do because currently there is a leadership vacuum at the company which is being filled by unions.
Bernstein Research analyst Max Warburton said the recent impressive profit performance did not show any fundamental shift in management, operations, cost or philosophy, but just reflected current market conditions.
“We remain unconvinced that the leopard has change is spots – in fact we’re not really clear who is in control of the company, how focussed management members are on the day job and how much hunger there is to lift the company’s performance,” Warburton said.
“We fear VW remains in limbo, with a senior management vacuum,” he said.
Since long-time leader Ferdinand Piech was ousted as chairman in 2015, Warburton said VW has lacked a credible leader.
“It seems to us that at VW the unions have stepped into the breach and are more dominant than ever,” Warburton said.
Evercore ISI analyst Arndt Ellinghorst is much more positive about VW.
“(after the early profit announcement) it feels like VW is finally hitting some of the right notes and helping its supporters by delivering some real earnings momentum. What a relief,” Ellinghorst said in his “Beast Awakens” report.
After VW announced changes to the way it reports own brand margins, Jefferies said this was progress.
“VW Group provided welcome guidance about upcoming changes in their reporting of distribution-related activities which distort VW brand margin. Simple adjustments suggest estimated Q1 margin of 3.9% could approach 5% under new reporting,” said Jefferies analyst Philippe Houchois.
Toyota’s margin is more than twice that. Last year the VW brand margin was 1.8% and under the new rules that would be around 2.2%.
Barclays Equity Research liked the margin move too.
“We think this bodes well as the margin of the VW brand is likely to remain investors’ key point of focus and where the company is under the most pressure to demonstrate improvement. If investors begin to see performance here and perhaps even the possibility of approaching the profitability of its French peers, then we think the group share price could see material upside from here,” Barclays’ analyst Kristina Church said.
But Evercore ISI wasn’t so impressed with the VW brand margin decision, saying it disguised improvements made already and was really juggling with figures.
“We expect VW to upgrade/move forward its outdated 4%/2020 VW brand target by Q3 this year. In any case, accounting doesn’t impact cash flow, and VW’s move doesn’t impact group earnings,” Evercore ISI’s Ellinghorst said.
In his report, Ellinghorst reiterated his position that VW was the biggest self-help story in global autos, and after Wednesday’s earnings confirmation news, declared confidence in profit improvement.
“We believe it has been discussed but is still unrecognized in market forecasts. Based on the first quarter VW should be on track to deliver 17.5 billion euros ($19.5 billion) in EBIT (earnings before interest and tax) this year compared with the Bloomberg consensus of 15.8 billion ($17.3 billion),” Ellinghorst said.
VW EBIT in 2016, before special items, was 14.6 billion euros ($16.0 billion).
The Wall Street Journal’s Heard on the Street columnist Stephen Wilmot said VW’s brand is now looking almost as profitable as European peers Renault and Peugeot, although the recovery wasn’t as spectacular as the latest numbers suggested.
“There will no doubt be bumps in the road, but the long anticipated VW-brand recovery does seem underway,” Wilmot said.