Saturday 26 October 2013

Analysis of Volkswagen (VW)

A German automobile producer

Company: Volkswagen

Business: A German automobile producer that are currently the third largest in the world. VW do not only produce cars but also trucks, buses and engines for heavy industry and ships. They have several brands today and to mention a few: VW, MAN, Scania, Bugatti, Lamborghini, SEAT etc. for a more complete list please look here.

Active: They are active world wide and are selling their vehicles in 153 countries as of today.

P/E: 3.8

The P/E of VW is without a doubt excellent! It is down as low as 3.8 and the P/B is fully acceptable with 1.1 which creates an as clear buy signal as Graham can give. The earnings to sales are very good with 11% and the ROE is excellent with 28%. The ratio of book to debt could have been a bit better since it is as low as 0.3. In the last five years they have had an extraordinary growth rate of yearly 11.1% that is strong! This gives us a motivated P/E of 28 to 30 which means that VW is highly undervalued by the market today. They pay a dividend that is a little bit too low for my liking but still 2% however that only represents less than 8% of their earnings so there is a low risk that they will be forced to decrease the dividend. They had a higher short debt then what they had cash available which is the reason for the remark.

Conclusion: Volkswagen scares me with their 22 billion € in profits. If the P/E would have been 15 or more then I would not have added them to the Stocks of Interest list (on the next update) but now I must do that and I also must seriously consider if I should step in as shareholder or not. The problem is that they will hardly be able to double their profits any longer but the P/E is so ridiculous low that even with half the profit the P/E would be excellent and both Daimler and BMW have a P/E around 10 so even compared to the other German car producers they only have one third of the P/E.

What to do with VW? Should one buy it? Am I too scared of cyclical companies?

If this analysis is outdated then you can request a new one.


Anonymous said...

Hi Fredrik,

Thanks for pointing this VW thing out.

I am not a great expert of the automotive sector. But there is clearly lots of M&A discussion taking place in that field those days (eg Peugeot recently).

That being said, one should then assess on which side of the M&A side VW sits, as it would give insights on potential M&A premium (or discount).

Again I am not an expert of the sector, but based on their market cap, current shareholding structure, as well as the previous Porsche "reverse take-over" outcome, I would probably put VW among the potential acquirers, not among the targets.

But this last assertion applies only in a stable world, with considering only so-called "developped world's" automative companies.

That could then potentially explain the low P/E (which discounts a natural dilution with a less performing company that would increase the consolidated P/E of the group).

Getting back to your initial thoughts, I indeed think that VW is a great company, with great design, logistics, cost management and most importantly high quality products (so is consumers perception). From a fundamental perspective, there is then clearly interest to pursue enquiry.

Hope this will help you as part of your journey to find the truth (if ever truth lies in equities research).



Anonymous said...

According to pe is 8,5. VW then still looks good but seems to be less undervalued.

Fredrik von Oberhausen said...

Thanks for you excellent comment @opcvm123! VW has for the last couple of years been making excellent acquisitions (no mergers to my knowledge), brought in the German technology and quality control and highly improved the quality of for instance SEAT and Skoda.

I think that VW will continue making acquisitions besides from maybe even starting up a car rental business just like BMW and Daimler have done. It would be funny to be able to rent a Porsche and pay per minute driven in a similar system to Car2Go and Drive Now.
Even though I am not a car fantast I can still see myself signing up to that program while being here in Germany and go for a spin on Autobahn.

I don´t think that I am clever enough to dig out any truth about VW and at some point I also fear that by thinking I have too much knowledge about a company I would simply get married to it and that usually leads to disaster.

To the second comment:

I have never used 4-traders before but I checked by looking at VW. I was a bit concerned with that site. What I could see then the P/E 8,5 comes from an eP/E so an estimated P/E for 2013 and they also had an estimated for 2014 but anyway for 2013 they call it an estimate but what they are doing is to divide the current price of the share with the net earnings from the half year of 2013 (which is 9.9 billions € or something like that) and this is wrong to use for the calculation. If they had used a running P/E with the end half of 2012 with the added half of 2013 then it would have been ok, but they did not.

So if you use that for all your analysis of companies then please be a bit careful with how they make their calculations and check it yourself each time because they seem to have some issues with the formulas at least with VW which was the only company I looked at.

PoomK said...

Hi Fredrik,

it's me again. I can show you how I calculate PE of VW AG using FY2012 financial results.

Fist, we begin with net profits. In 2012 there was a one-time financial profit from the acquisition of Porsche. Since this is one-time gain, we should ignore it from the calculation.

So, instead of net profits, we shall use operating profit which reflects more how the company generate a reproducible income. In 2012 the operating profit was 11,510 M.EUR.

Second, we consider the market cap of the company. VG AG has two types of shares; Preferred and Common. If I use the latest price we'll have the market cap as:

170,142,778 Preferred stocks x 188.55 EUR each

295,089,818 Common stocks x 181 EUR each

= Market Cap. 85,491 M.EUR

That means the adjusted P/E ratio is ≃ "Price"/"Operating Profit" = 85,491 / 11,510 = 7.43

Which is still not bad.

Third, we can also estimate P/B from the book value (equity) of the company. According to Börse Frankfurt, the total equity is 77,515 M.EUR

Therefore: P/B = 85,491 / 77,515 = 1.10

Fourth, ROE = E/B = (P/B)/(P/E) = 1.10 / 7.43 = 15%

Which is also not bad compared to other companies in this business.

Whether it's undervalue or not, I have no comment.

But personally I value VW over other car companies (shareholder bias). One reason is because of its magnificent performance in the past years.

They took over ancient-looking Audi, and made it sporty.

They took over Lamborghini, and made it drive-able.

They revived Bugatti, and made it the king of cars.

Now they just took over Porsche, which is infamous for its awful handling.

I wonder how would they tame this furious beast.

Poom K.

Fredrik von Oberhausen said...

Hi Poom K.,

Great to have you back again! You seem to be a careful investor that I can learn from and learning is something that I must definitely do when it comes to investing.

It is indeed true that I did not look at the operating profit but purely on the revenue of 2012 for making the contrarian analysis.

The change from earnings to operating profit lead to large changes in both P/E as well as ROE just like you show us.

I guess this is part of the reason for why people are using P/E3 or P/E5 to even out those kind of one time effects without being forced to go through the annual reports.

Hahaha, the funny thing is that each time you write a comment to me you seriously disturb my circles and I have to re-think how I do things. It is great! Thanks!

I have some long term plans with this blog which is until I reach my 750,000 € which I will need to be able to pay for my living costs once I retire at 75 or 80 years and my idea is that either I discover that one of my old analysed companies are looking very contrarian or that a reader discovers it and asks for a new analysis maybe 2-3 years from now.

I will then of course analyse it again and will get a new snap-shot with how has the growth been for the last 7-8 years, what is the current earnings, current price current quantity of stocks, book value etc. Over time I will then build up a feeling as well as a large library of the companies with their revenue, earnings, profits, growth etc. I also hope that readers can direct me to stocks that will be great to buy and hopefully especially companies that I have then already previous analysed.

When I came here to Germany I knew very few companies and today by name I know at least as much as my German colleagues and I hope to improve that even further!

So my thought was that over time I would build up information that will then also even out temporary effects (such as one time large profits) but maybe that is a stupid thought and maybe my result would be much better if I would not do like this.

However as the scientist I am I am forced to push an experiment until it is really proven that it does not work. In this case my loss will be my own money so the stakes (bad word because it is not gambling but still...) are even higher than usual.

Great comment Poom K. and it proves that each and every one must make their own analysis of every company each time!

PoomK said...

If you keep doing the analysis of companies, I'm sure you'll reach you financial goal someday. I also learned about many new companies from reading your blog too.