VW’s Lumbering Performance Could Be About To Change.
Some Think So With “Beast Awakens” and “Let There Be Light” Reports
If there are mounting doubts about industry prospects, some investors singled out Volkswagen as one manufacturer which might rise above any problems.
After VW’s early announcement of its strong first quarter, investment researcher Evercore ISI, which has long pointed to the underlying potential of the company because of its chronic inefficiencies, published a report entitled “The Beast Awakens”.
“(after the early 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,” said Evercore ISI analyst Arndt Ellinghorst.
A few days later, after VW announced some changes to the way it reports its brand’s profit margins, investment bank Jefferies joined in the euphoria with its report “Let there be light!”
“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 per cent could approach 5 per cent under new reporting,” said Jefferies analyst Philippe Houchois.
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“We expect VW to upgrade/move forward its outdated 4 per cent/2020 VW brand target by Q3 this year.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 Beast Awakens report, Ellinghorst reiterated his position that VW was the biggest self-help story in global autos because returning to cost levels of 5 to 6 years ago would lead to €16 billion of annual efficiency gains.
Fixed costs down
In the first quarter VW said group operating profit rose to €4.4 billion from €3.4 billion in the same period of 2016, in the statement ahead of schedule. In this report VW reported fixed costs down for the first time, while material costs declined also.
“Going forward, it is crucial that VW looks to reduce material costs further, from the unreasonably high level of €140 billion. Reducing VW’s complexity and improving operational leverage is the single biggest opportunity for the Group,” Ellinghorst said.