Trading At A Mere 4x Earnings, Is Volkswagen Stock Attractive?

Volkswagen stock (OTCMKTS: VWAGY) has been a laggard of sorts, declining by about 18% over the last 12 months, compared to rivals GM and Toyota who have gained 14% and 20%, respectively, over the same period. However, the stock has gained about 12% year-to-date in 2024. Several factors have been weighing VW down. High interest rates have also made it more expensive for customers to finance vehicles, leading to weaker demand growth. While deliveries expanded by 12% year-over-year in 2023, the company only expects a 3% rise in its car sales this year citing a tough economic outlook.  VW has been investing heavily in its pivot toward EVs and this is taking time to pay off. All-electric vehicle sales for the group stood at about 239,500 units for Q4 2023, up just about 16% year-over-year. While VW has noted that uptake for EVs has been weaker than expected,  Tesla’s Model Y became the single best-selling vehicle in Europe last year. VW’s business in China, one of its largest markets, is also seeing challenges amid weaker consumer sentiment, a tough economic outlook, the ongoing real estate crisis, and mounting competition from a new wave of EV manufacturers who are gaining ground quickly. VW, which operates via joint ventures in the Chinese market, has guided for its proportional share of operating profits of 1.5 and 2 billion euros for 2024 ($1.6 to $2.2 billion), down from 2.62 billion euros ($2.8 billion) in 2023. The company’s thin margins are also a concern. For the last year, VW’s consolidated operating margins stood at just 7%, down from 7.9% in the year-ago period, with its core brand group reporting a 2023 operating margin of 5.3%. This is below the likes of Toyota, which posted margins of about 11% for the first nine months of FY’24. 

Looking at a slightly longer period, VWAGY stock has faced a notable decline of 25% from levels of $20 in early January 2021 to around $15 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the decrease in VWAGY stock has been far from consistent. Returns for the stock were 40% in 2021, -46% in 2022, and -17% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that VWAGY underperformed the S&P in 2022 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the mega-cap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could VWAGY face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

We think the stock looks like a decent value at current levels of about $14 per share. VW stock trades at just about 4x consensus 2024 earnings, which is even below U.S. automakers Ford and GM, which trade at 6.5x and 5x forward earnings. Totoya trades at about 10x forward earnings. The stock also has a thick dividend yield of close to 8%. While VW’s EV transition may be going at a slow pace, the company could have some advantages in the long run. VW has a vast umbrella of brands that could offer consumers considerable choice while giving the company economies of scale as it standardizes its platforms, potentially helping to improve margins. VW is also focusing on backward integrating its EV operations by investing in building out its battery plants. The company has also been taking steps to unlock value from its brand portfolio. VW took its sports car brand Porsche public in 2022 and we think that it could do the same with its Lamborghini supercar brand, given the premium that investors are placing on luxury and performance brands.  For example, Ferrari has a market cap of $74 billion, which is higher than VW’s current market valuation. We value VW stock at about $18 per share, which is about 20% ahead of the current market price. See our interactive analysis on Volkswagen Valuation: Expensive Or Cheap? for more details. See our dashboard on Volkswagen Revenue for an overview of Volkswagen’s business model and how its revenues are likely to trend.

[1] Returns as of 3/15/2024
[2] Cumulative total returns since the end of 2016

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