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VW Sales Boom, But Profits Will Fail To Keep Pace

Porsche, Audi Make Huge Contributions.
10 Million Sales Target Arrives Four Years Early.

Volkswagen has an impressive record of accelerating sales as it pushes towards its ambition of number one in the world and 10 million sales a year, but investors are worrying because VW brand profits are stagnating and aren’t likely to gather pace any time soon.

The fact that recently acquired Porsche is proving massively profitable, alongside the premium subsidiary Audi, will probably help to console them though.

In 2013, VW Group operating profit rose 1.5 per cent to €11.7 billion. Porsche, with its tiny contribution of 155,000 vehicle sales compared with VW brand sales of 4.7 million, provided €2.6 billion of operating profit. Audi’s operating profit was close to €5 billion.

At a press conference in Berlin, VW CEO Martin Winterkorn said VW sales will hit 10 million this year, four years earlier than originally planned.

Analysts attending the event though were less impressed with the profits likely to be generated by this sales increase.

International Strategy and Investing (ISI) pointed out that even if VW Group reaches the high end of its profit projection for 2014 of €13 billion, this means operating profits were broadly flat for four years, despite sales increasing from €160 billion to an estimated €205 billion this year. ISI said if you don’t count Porsche, VW Group operating profits for 2014 would only be €9.7 billion, 15 per cent below the 2011 level when Porsche wasn’t included.

“Porsche is of course a central part of VW today and taking it out is an exercise……..We believe the key reason for the disappointment of core VW is the performance of the VW car brand, which is 50 per cent of revenues. We estimate that between 2011 and 2014, the VW brand’s (operating profit) will have fallen by some 30 per cent – from €3.8 billion to €2.6 billion,” ISI analyst Arndt Ellinghorst said.

Sceptic
Bernstein Research is another VW sceptic, agreeing that VW will make almost the same operating profit in 2014 as it made in 2011.

“VW spent quite a few years building expectations with massive global market share wins and promises of huge MQB savings. But the company has had to spend the last 18-24 months deflating these expectations. Warning that profits would be flat in 2013 came as a negative surprise to the market. VW issued exactly the same warning about 2014,” Bernstein Research analyst Max Warburton said.

Warburton said VW remains an impressively profitable company, but without gains in profit, the share price is unlikely to show much progress. Earnings growth requires progress in the still ailing U.S. market, less arduous foreign exchange conditions, big market share gains, or what Warburton called “a proper European recovery.”

ISI’s Ellinghorst also sees some major hurdles for VW to jump. These include challenges in emerging markets, foreign exchange exposure, while the new product diary looks thin through 2014. Ellinghorst also  points to worries about VW’s U.S. performance.

“VW remains in a difficult position to increase margins this year, and maybe next,” Ellinghorst said.

Buy VW
Commerzbank analyst Daniel Schwarz pointed out that at the Berlin meeting, the company warned about increasing foreign currency costs, and rising fixed costs, while also lauding the possibilities of rising sales in Europe, healthy, low stocks and pricing stability.

Schwarz like the second scenario the best, and recommended that investors buy VW shares.

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