EUR 850.00 For Business Accounts Only

Morningstar | VWAPY Updated Forecasts and Estimates from 16 Nov 2018

No-moat-rated Volkswagen reported earnings per diluted preferred share before special items, or EPS, of EUR 6.56. The result blew away the consensus EPS estimate of EUR 5.13 and was well ahead of the EUR 5.82 reported in the third quarter of 2017. Even so, a reduced effective tax rate versus the year-ago period was the primary driver behind the EPS outperformance. Volkswagen stock is attractively valued in our view, currently trading at 4-stars and a 33% discount to our EUR 230 fair value estimate.

Consolidated revenue increased 1% to EUR 55.2 billion from EUR 54.7 billion despite a 4.3% decline in consolidated unit volume, excluding China joint ventures. A 2% increase in financial services revenue helped offset the volume decline. However, third quarter group operating income dropped 16% to EUR 3.7 billion from EUR 4.4 billion, while operating margin contracted by 140 basis points to 6.7% from 8.1%. We had expected weaker operating performance due primarily to WLTP in Europe and softening demand in China.

Management confirmed 2018 guidance but warned that "growing protectionism" represents a risk to the outlook. The company continues to forecast an increase of as much as 5% in consolidated revenue compared with 2017 and consolidated adjusted operating profit margin (before special items) within a range of 6.5% to 7.5%, despite this year's cost headwinds including heavy launch costs, currency, and a longer, more expensive government approval process for emission certification (WLTP). Notwithstanding headwinds, this year’s margin guidance represents a 50-basis point expansion versus last year’s guidance of 6.0% to 7.0%.

In our opinion, 4-star-rated Volkswagen shares offer investors compelling valuation. Even though the worst is over in the U.S., our main concern about Volkswagen stock remains the uncertainty surrounding the ongoing shareholder litigation due to the diesel scandal, potential EU consumer advocacy group litigation, and European investigations into possible diesel equipment collusion. We also believe the market has discounted the stock on concerns that trade tariffs may escalate and on the higher investment needed in autonomy and powertrain electrification, which our fair value already takes into consideration. The preferred shares (much more liquid than the ordinary) currently trade at a compelling 33% discount to our EUR 230 fair value estimate.