Skip to Content
Stock Analyst Update

What Electric Vehicles Mean for Volkswagen's Margins

The automaker plans to expand production of electric vehicles worldwide.

Mentioned:

No-moat rated  Volkswagen, (VLKPY) maker of Audi, Bugatti, Lamborghini, Porsche, SEAT, Skoda, and Volkswagen automobiles, plus MAN, Scania, and Volkswagen commercial trucks, reported full-year 2017 earnings per share before special items (EPS) of EUR 26.07, EUR 1.19 better than the sell-side consensus and EUR 4.63 higher than the year ago EPS. Guidance for 2018 included a 5% increase in group (includes financial services) revenue and group operating margin in a range of 6.5%-7.5%. We think the market has overly discounted Volkswagen shares for various diesel related issues and increased spending for powertrain electrification. This 4-star rated stock is attractively valued, currently trading at a 30% discount to our EUR 221 fair value estimate.

Consolidated revenue, which includes financial services, increased 6% to EUR 230.7 billion compared with EUR 217.3 billion last year. However, operating profit excluding special items was at an all-time record for the group at EUR 17.0 billion, resulting in a 7.4% operating return on sales. The operating result was 17% higher than last year and represented a healthy 70-basis-point expansion in margin.

Volkswagen’s Roadmap E strategic plan to implement electric powertrain vehicles includes making electric vehicles in 16 different global locations by 2022, 80 new electric models, and annual production volume of 3 million electric vehicles by 2025. Our EUR 221 fair value estimate includes margin contraction for higher investment in powertrain electrification. Volkswagen’s 10-year historical median EBITDA margin, which includes Chinese JV equity income, is 14%. We assume a 13.0% normalized sustainable midcycle EBITDA margin, 100 basis points below the 10-year median. Total capital expenditures and capitalized development spending as a percent of revenue for the past 10 years has averaged 8%. Our Stage I forecast total capital spending averages 10% of revenue.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.