Even after assuming harsher fines and penalties, as well as our assumptions for degradation of the brands, Volkswagen shares appear to be undervalued. With a five-star rating, the stock trades at more than a 40% discount to Morningstar analysts’ €190 fair value estimate.
Automotive revenue is unscathed by the diesel emission scandal
Even so, under the current circumstances, Volkswagen (VW.) stock is not for the faint of heart. Caution is warranted as shares are likely to be volatile from heavy news flow hitting the markets on the likely myriad of company announcements about management changes and about the criminal investigation of Volkswagen diesel-gate. Headline news risk will keep stock price volatility high for several months as the diesel emission debacle will result in more management changes, government fines, higher recall costs, and litigation.
No-moat-rated Volkswagen reported third-quarter earnings per share before special items of €3.76, up substantially compared with the consensus of -€2.45. Including the charge of €6.7 billion for the diesel emission scandal and €1.5 billion in financial income from the sale of Suzuki stock during the quarter, the company reported consolidated earnings per share including special items of -€3.45.
Automotive revenue and volume appeared to be unscathed by the diesel emission scandal; revenue increased 4% to €44.2 billion while volume excluding China joint ventures slightly improved by around 1%.
Volkswagen’s third-quarter 4% revenue increase was supported by a 12% revenue jump on a 6% volume increase for Europe. In North America, the company benefited from a 19% appreciation in the value of the U.S. dollar relative to the euro plus a 15% increase in volume that resulted in the region’s revenue spiking 35%.
The improvement in Europe and North America more than offset substantial declines in revenue and volume for South America and Asia Pacific. In South America, revenue and volume dropped 30% and 32%, respectively, while the Asia-Pacific region declined 21% and 10%, each.
Overall, revenue was better than we had anticipated. If the outperformance persists through the fourth quarter, our 2015 full-year automotive revenue estimate of €173.6 billion, down 2% from 2014, will be light.