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VW Raises Profit, But Investors Question The Quality

VW Raises Profit, But Investors Question The Quality.

Next Milestone; Possible Agreement With Unions.

“The snag is that the improvements are mainly down to accounting tweaks”

Volkswagen reported sharply higher operating profits in the third quarter, but investors gave a thumbs down, saying the gain was more about financial juggling than an improvement in the bottom line.

“Volkswagen is relying on financial paintwork to cover up its rusty spots. The snag is that the improvements are mainly down to accounting tweaks,” is how Reuters Breaking Views correspondent Olaf Storbeck put it.

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

Commerzbank Equity Research agreed that results weren’t all they seemed, saying 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.

Citi Research was troubled by the results, but not enough to turn away from the shares.

“We see Volkswagen stock as an awkward combination of great opportunity and great uncertainty,” said Citi Research analyst Michael Tyndall.

Tyndall said investors were wary of VW’s use of higher R&D capitalisation and other accounting decisions, but this was harsh, given that R&D points to brighter prospects ahead. There is still a problem of over-spending though and margins are flat, he said.

Limited evidence
“As such there is limited evidence to date of significant change and meanwhile the event risk on the diesel issue is still palpable. We still believe change is coming and we remain Buyers (of the shares),” Tyndall said.

Breaking Views’ Storbeck said VW had capitalised 41.7 per cent of its R&D spending in the first nine months, almost a third more than the average for the previous 5 years. This helped to lower operating costs by almost €600 million euros.

“Meanwhile, Volkswagen’s day-to-day business is still struggling from the fallout of the diesel emissions scandal. Its eponymous passenger car brand, which accounts for roughly half of vehicle sales, is dogged by high wages, an inefficient production network and the reputational fallout from the scandal. Operating profit in that business halved in the third quarter,” Storbeck said.

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.

Structural reorganisation
Investors are now awaiting results of negotiations with unions on a structural reorganisation.

Barclays Equity Research analyst Kristina 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.

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