Volkswagen Preferred Stock: Now Undervalued, I’m Buying

Pricey readers/followers,

Volkswagen (OTCPK:VWAGY) (OTC:VLKPF) has lengthy been on my listing of firms to personal and spend money on. Whereas the corporate has gone by way of a number of scandals and has been very unstable as an funding over the previous couple of years, the native share has seen highs of over €300 over the previous 3 years, and at present trades at not more than €147.8. At COVID-19 lows, the corporate was not more than €103, at instances closing in on a double-digit share worth.

This could indicate that Volkswagen is a dangerous and at instances troubled firm on a elementary degree. However there may be little or no reality in that assertion.

Volkswagen – Trying on the fundamentals

Volkswagen is among the largest automotive companies on the planet. Whereas it won’t be as “attractive”, as say Tesla (TSLA), it is a strong enterprise with an 85+ 12 months historical past with headquarters within the city of Wolfsburg in Germany.

Its unlucky previous includes its creation underneath the banner of the Nazi get together (German Labour Entrance), which was revived post-WW2 by the British military officer Ivan Hirst.

The corporate is most well-known for the long-lasting Beetle automotive, and it is extra importantly the flagship model of the Volkswagen Group, which includes such storied manufacturers as VW, Audi, Bentley, Ducati, Porsche, Jetta, Scout, Seat, Skoda and Traton (OTCPK:TRATF). These are owned to numerous levels – most of them 100%-owned by the Volkswagen Group.

Now, these of you from NA won’t have heard a lot about Skoda and Seat – they’re kind of European funds manufacturers that maintain the same market-leading place to US funds manufacturers, besides they’re over right here. As a substitute of shopping for typical funds manufacturers you may know, individuals elect to purchase a Skoda or a Seat as a substitute – Seat, particularly in Southern Europe.

Volkswagen AG was the most important automotive producer on the planet by gross sales between the years 2016-2017. Like many different manufacturers, its principal market is at present China, which delivers round 40 of annual gross sales and earnings.

The corporate’s relationship with Porsche has been a posh one as a result of Ferdinand Porsche was initially employed by Hitler for the corporate mission, and the primary automotive from Porsche used loads of Beetle automobiles, and through the years, Porsches have used many parts from the VW shelf, in addition to seen shared manufacturing for a lot of of its fashions. There’s additionally a really complicated possession dynamic, which I describe nearer in my Porsche (OTCPK:POAHY) articles.

The corporate produces a myriad of various fashions, and its lineup of automobiles may even be market-dependent, with some fashions obtainable solely in some markets.

Gross sales figures are attention-grabbing. The very best-selling VW space apart from China is Western Europe. The corporate offered a complete of 4.89M automobiles for 2021, which is 8.1% adverse YoY in comparison with 2020 – nevertheless, the gross sales numbers in NA have been up 13%, with each different market down besides APAC/Center East. The proportion of VW BEVs and hybrid autos practically doubled for VW that 12 months – however that is nonetheless solely 7.5% of the full deliveries for all of 2021, although that quantity in Europe is nineteen.3%, not beneath 10%. A complete of 77,100 BEVs (+437% YoY) have been delivered in China, together with greater than 70,000 from the ID. household, making Volkswagen one of many 5 largest BEV suppliers in China. The worldwide hottest BEV was the ID.4.

On a prime degree, the corporate’s general monetary fundamentals are strong and in step with different firms in the identical section.

Apart from that, the SUV craze continues. VW’s non-BEV gross sales are topped with SUVs, with the Tiguan near the highest there. 40% of the corporate’s whole deliveries are SUVs of some type – however the best-selling automotive in Germany regardless of all this was nonetheless uncontested – it is the Golf.

So VW nonetheless has some work to do convincing individuals to go electrical. The Tiguan was the best-selling mannequin within the firm’s lineup, because it has been since 2019 when it beat out the Golf on a world foundation, and after that, it is the Polo, The Passat, the Lavida and the Jetta – once more, all world numbers.

Volkswagen has, regardless of share worth volatility, remained a comparatively secure payor of dividends. It is also a stable-rated firm by way of credit score – BBB+ from S&P and an A3 from Moody’s, confirming the protection you get right here by investing. The dividends for the choice share which I’m writing about, that are tied strictly to firm earnings, have typically rewarded shareholders with a relatively excessive payout primarily based on strong and secure general tendencies. Right here is how that relationship, typically talking, seems.

As you possibly can see, the approaching free years are at present all for relative earnings stability, with some ups, and downs, however not a lot.

Volkswagen is an automotive producer, that means that it is pretty intently tied to the cyclicality of the general market. We are able to observe this after we take a look at how violently the corporate strikes up and down. Check out the 10-year development.

As you possibly can see, Volkswagen hasn’t been an excellent funding – at the very least if you happen to fail to concentrate to valuation tendencies, that are a bit “core/elementary” as issues are right here. The identical factor that is true for any automotive firm can be true for Volkswagen. If you happen to purchase this enterprise at a too-high valuation, your cash will be misplaced for a decade or extra, given the adverse RoR you would be getting in a downcycle, even when together with the potential of a pretty dividend payout.

Current outcomes affirm the challenges the corporate is underneath, which is considerably pressuring the corporate’s valuation right here. Deliveries are down practically 13% YoY, and this adverse is coming largely on account of China and provide chain points/half availability.

Nevertheless, deliveries of BEVs are up 245%, and the share of the full is as much as 6% of gross sales, up from 4.2% YoY. In the meantime, worth bumps and FDX imply that group gross sales income is up 8.8% regardless of deliveries being down, and that features round near €8B from Navistar which has been consolidated into the corporate since YoY. Additionally, the corporate’s monetary service arm is seeing continued success regardless of the macro challenges right here.

Pre-Tax revenue because of this is up nearly €3b to €17B, and this consists of an impairment lack of near €2B for Argo AI, that means that web revenue is as much as €12.8B for the corporate. The corporate’s web money stream continues to point out stability, and the corporate’s CAPEX ratio (to gross sales) stays secure at round 3.8-4.3%.

Volkswagen has no liquidity or money points, with web liquidity coming in at €31.6B due to profitable placement of hybrid notes, in addition to an enormous money influx from the finally-completed Porsche IPO – although notice that the IPO will not be but included on this quantity.

The corporate is using over 660,000 individuals worldwide, and produces its merchandise in 72 automobile vegetation throughout the globe, with a majority in Europe (34 of them). Internally, the corporate splits its gross sales/manufacturers between the “quantity manufacturers”, that are VW, Skoda, Seat, and related…

…and the Premium Model group, which holds Audi, Bentley, Lamborghini and Ducati. Tendentially, premium automobiles have a tendency to offer higher margins, and certainly the relative working end result development and margins are higher for this section, regardless of gross sales being far larger within the quantity section. A bunch like VW wants each although. However each Lambo and Bentley carried out admirably throughout the previous couple of months.

So what’s Porsche, you may ask?

Effectively, that is what VW considers the “Motorsport & Luxurious Model Group”, which has just one model – Porsche. The outcomes listed here are completely stellar, and Porsche alone has half the gross sales of all different premium manufacturers mixed, and three-quarters of the web money stream. That ought to point out to you the way vital Porsche is to the corporate as a money stream generator.

There’s lots to love about Volkswagen’s coming mannequin refreshment and the lineup the corporate presents – each in and outdoors of Europe. The corporate will convey the Tavendor SUV to market in China, Skoda is bringing a brand new idea automotive, Seat is presenting the brand new Tarraco, and Audi is bringing new ideas and merchandise to market. Lamborghini which is a part of the enterprise is bringing out the brand new Urus super-SUV, and Bentley is bringing out the brand new Flying Spur Velocity. Porsche, in the meantime, is driving innovation with its 911 GT3 RS, and maybe most significantly for VW, particularly in Europe, the corporate is bringing out the ID. Buzz Cargo, their industrial e-mobility resolution.

All in all and regardless of downturns right here on account of points in manufacturing and market weak spot, there may be a lot to love about Volkswagen in a approach that has had me ready on the sidelines for the worth of the corporate to drop beneath a sure degree – which we’ve got now lastly seen.

For that purpose – valuation, I will be favorable on Volkswagen right here – let me present you what I like in regards to the present worth.

Volkswagen’s Valuation

Volkswagen performs in an attention-grabbing group of friends, each European, American, and Asian, although few however the largest firm can actually measure up in Volkswagen by way of gross sales. Even evaluating it to one thing like Tesla is laughable to a conservative, dividend-oriented worth investor like myself, as a result of Volkswagen trades at a below-5x normalized P/E whereas yielding nearly 6% – over 6% for the popular share that we’re taking a look at, and that yield is comparatively well-covered by at this time’s numbers.

VW’s present tendencies are trying very engaging. On a gross sales a number of, VW is used to buying and selling near 0.5x gross sales. The corporate competes with related working margins to different automotive producers, however as a result of it has a excessive quantity of premium and luxurious automotive gross sales, that margin is larger than a few of its friends, coming to eight.6% year-to-date OM.

Effectively, you may say, Tesla has twice that (or near) – and yeah, it at present does. However VW additionally would not commerce at a 30x+ P/E ratio, and VW has a strong dividend that is lined by years and years of custom, in addition to a historical past going again over 80 years. The 2, to my thoughts, don’t evaluate for conservative traders. One wins a spot in a portfolio, the opposite doesn’t – the opposite right here being TSLA.

Different friends within the automotive trade are Toyota (TM), Stellantis (STLA), Mercedes (OTCPK:MBGAF), BMW (OTCPK:BMWYY), Honda (HMC), and Hyundai (OTCPK:HYMLF). I cowl many of those and personal nearly all of them as effectively. Trying on the valuation of this peer group is one thing I do very often. Every time one in all them drops beneath that elusive 1x income quantity (besides Honda, that one’s buying and selling beneath 0.5x earlier than it will get attention-grabbing on account of that harder combine), they could develop into attention-grabbing.

Volkswagen, from a peer-based perspective, is attention-grabbing right here as a result of it is now at 0.85x. It is also beneath a normalized 6x TEV/EBITDA, which once more is beneath par right here, regardless of good outcomes for the enterprise.

The corporate’s share worth targets have been considerably lowered because the EV craze, when analysts thought the corporate was price €300/share for the frequent. That is right down to €211.9 at a mean base, with a spread beginning at €148 and going as much as €328 (these EV-maniacs are nonetheless there…).

Nevertheless, the extra vital factor right here is that Volkswagen is now buying and selling beneath even the bottom-line share worth goal.

All the numbers I give to you might be only a comparative/monetary mathematical approach of claiming that Volkswagen is now extra undervalued than it has been in a while.

That’s of curiosity to me. Even to a €200/share PT, the corporate has near a 40% normalized upside right here. The yield is strong – even when the dividend for the fiscal of 2022 goes down a bit, it is nonetheless an excellent yield, and you’ll’t argue with the corporate’s fundamentals. As a result of how do you argue with an organization whose annual gross sales revenues are greater than the whole GDP of over 30 whole nations, together with nations like Slovakia, Ecuador, Oman, Bulgaria, Algeria, Hungary, and Ukraine (pre-war)? It is not simply revenues – the corporate makes an 8%+ working margin from these numbers.

Investing in Volkswagen’s most popular share, to me, is like investing in a Bond. You would go both for the native. Throughout the previous disaster, I did. This time, I am going for the pref. In contrast to typical most popular shares, this one strikes at a far wider vary than others – and the yield is healthier.

I additionally suppose you must take into account the prefs as a result of the VW prefs are typical with a lot larger liquidity – they do not have voting rights, however the possibilities of you exercising that if you happen to’re studying that is very small, and so they additionally include precedence payout within the case of any points.

So, right here is my initiatory stance for Volkswagen.

Volkswagen Thesis

• Volkswagen is a world-leading automotive producer that produces among the most beloved automobiles on earth, it doesn’t matter what geography you are taking a look at. The corporate has strong fundamentals, and a strong dividend, and comes with proudly owning Porsche in a approach.
• The corporate can be at present very low cost, after a major share worth decline, and I, due to this fact, welcome these modifications to be able to as soon as once more begin investing within the share.
• My selection is the popular share – it is my perception that this needs to be yours as effectively. My PT for the pref is round €170, making it round 40% upside from at this time’s share worth. The pref trades at native ticker VOW3.
• The corporate is a “Purchase” for me right here.

Bear in mind, I am all about:

1. Shopping for undervalued – even when that undervaluation is slight, and never mind-numbingly large – firms at a reduction, permitting them to normalize over time and harvesting capital positive aspects and dividends within the meantime.

2. If the corporate goes effectively past normalization and goes into overvaluation, I harvest positive aspects and rotate my place into different undervalued shares, repeating #1.

3. If the corporate would not go into overvaluation, however hovers inside a good worth, or goes again right down to undervaluation, I purchase extra as time permits.

4. I reinvest proceeds from dividends, financial savings from work, or different money inflows as laid out in #1.

Listed here are my standards and the way the corporate fulfills them (italicized).

• This firm is general qualitative.
• This firm is essentially secure/conservative & well-run.
• This firm pays a well-covered dividend.
• This firm is at present low cost.
• This firm has a sensible upside primarily based on earnings development or a number of growth/reversion.

The corporate fulfills each single one in all my funding standards, and is a “Purchase”.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.