One of the world’s largest automobile companies Volkswagen AG (VWAGY), has ambitious plans to be a major electric vehicle (EV) manufacturer and is investing significantly in expanding and improving its EV capabilities. Given its robust financials, discounted valuation, and higher-than-industry profitability, it could be wise to invest in the stock for a long-term horizon. Read on…

Headquartered in Wolfsburg, Germany, Volkswagen AG (VWAGY) manufactures and sells automobiles. It operates in four segments: passenger cars; light and heavy commercial vehicles; power engineering; and financial services. The company owns brands like Audi, Porsche, Lamborghini, SKODA, Bentley, Scania, MAN, Ducati, Volkswagen Commercial Vehicles, and Bugatti.

As electric vehicles keep witnessing increased adoption, VWAGY has committed more than $100 billion toward electrification. The company has allocated more than half of its total spending of $180 billion toward building electric vehicles (EVs). However, the company has reduced its spending on hybrid vehicles by 30%. Last year, the company sold 8.60 million vehicles globally, of which 452,900 were electric.

VWAGY expects its global electric vehicle sales to rise to 25% of total sales by the end of 2026, compared to the current 5-6%. Over the next five years, the company has earmarked $7.10 billion for its electrical and digital push in North America. It has set the target of achieving 55% of its U.S. sales fully electric by 2030.

On June 8, 2022, VWAGY opened its Battery Engineering Lab (BEL) in Chattanooga, Tennessee. This will help the company gain an edge over its competitors by boosting its product portfolio, R&D, and manufacturing of electric vehicles. Alongside its $800 million factory electrification in Chattanooga, the BEL will enable the testing and optimization of the batteries for all-electric vehicles sold in the United States.

According to Bloomberg Intelligence’s Battery Electric Vehicles Report – Automakers Race to the Top, VWAGY is expected to dislodge Tesla, Inc. (TSLA) from its position as the number one battery electric vehicle (BEV) maker by sales in 2024.

VWAGY’s stock has declined 34.1% in price year-to-date and 43.4% over the past year to close the last trading session at $19.22.

Here’s what could influence VWAGY’s performance in the upcoming months:

Robust Financials

VWAGY’s sales revenue increased 0.5% year-over-year to €62.74 billion ($66.21 billion) for the first quarter ended March 31, 2022. The company’s earnings after tax increased 96.9% year-over-year to €6.72 billion ($7.09 billion). Also, its earnings per preferred share came in at €13.11, representing an increase of 101.3% year-over-year.

In addition, its cash flow from operating activities increased 2.7% year-over-year to €9.31 billion ($9.82 billion).

Mixed Analyst Estimates

Analysts expect VWAGY’s EPS and revenue for fiscal 2022 to increase 96.7% and 4.5% year-over-year to $6.39 and $286.49 billion, respectively. For fiscal 2023, its revenue is expected to increase 5.9% year-over-year to $303.41 billion, while its EPS is expected to decline 5.2% year-over-year to $6.06.

Discounted Valuation

In terms of forward EV/EBITDA, VWAGY’s 6.51x is 22% lower than the 8.36x industry average. Its forward P/S of 0.26x is 71.1% lower than the 0.89x industry average. Also, the stock's 0.91x forward EV/S is 16.7% lower than the 1.09x industry average.

High Profitability

In terms of trailing-12-month net income margin, VWAGY’s 7.46% is 16.6% higher than the 6.39% industry average. Likewise, its 4.17% trailing-12-month Capex/S is 42.6% higher than the industry average of 2.92%. In addition, its 8.34% trailing-12-month levered FCF margin is 145.8% higher than the 3.39% industry average.

POWR Ratings Show Promise

VWAGY has an overall B rating, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. VWAGY has an A grade for Value, in sync with its 0.42x trailing-12-month P/B, which is 79.5% lower than the industry average of 2.07x.

It has a B grade for Quality, consistent with its 14.25% trailing-12-month EBITDA margin, which is 17.6% higher than the industry average of 12.11%.

VWAGY is ranked #12 out of 65 stocks in the Auto & Vehicle Manufacturers industry.

Click here to access VWAGY’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

VWAGY is expected to be a significant beneficiary of the rising adoption of EVs as the company has made significant investments in EV manufacturing, R&D, and battery technology. The company is expected to leapfrog TSLA in EV sales by the end of 2024.

Moreover, its robust financials, discounted valuation, and higher-than-industry profitability strengthen the investment case. Therefore, we think adding this stock to your portfolio at the current price level could be wise.

How Does Volkswagen AG (VWAGY) Stack Up Against its Peers?

VWAGY has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Auto & Vehicle Manufacturers' stocks with an A (Strong Buy) and B (Buy) rating: Honda Motor Co., Ltd. (HMC), Bayerische Motoren Werke Aktiengesellschaft (BMWYY), and Mazda Motor Corporation (MZDAY).

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VWAGY shares were trading at $19.39 per share on Monday morning, up $0.17 (+0.86%). Year-to-date, VWAGY has declined -31.83%, versus a -17.62% rise in the benchmark S&P 500 index during the same period.

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About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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