Electrifying Adventures And Cost Innovations Drive Future-Ready Growth

Key Takeaways

• Planned joint ventures and the launch of new brands aim to boost revenue and market presence, particularly in the U.S. and electric vehicle segments.
  
• Cost-cutting measures and strategic investments are projected to enhance operating margins and support stable earnings growth and CO2 compliance.
  
• Competitive pressures and declining demand in China and Germany challenge Volkswagen's revenue growth, profit margins, and financial stability.

Catalysts

Manufactures and sells automobiles in Germany, other European countries, North America, South America, the Asia-Pacific, and internationally.

• Volkswagen's planned joint venture with Rivian aims to develop next-generation SUV software-defined vehicle architecture, enabling efficient use of capital and reduced costs per vehicle, which will enhance revenue growth and net margins.
  
• The launch of the new Scout brand in North America, targeting highly profitable off-road segments as they transition to electric, is expected to strengthen Volkswagen's revenue streams and market presence in the U.S.
  
• Numerous electric model launches, such as the Audi A6 e-tron and Skoda Elroq, are expected to drive revenue growth through increased market share in the growing electric vehicle segment.
  
• The introduction of cost-cutting measures and improved productivity, especially in German operations, aims to boost net margins by achieving competitive factory costs and meeting the target of a 6.5% operating margin for the Volkswagen brand by 2026.
  
• The company's positive order intake trend, particularly for BEVs in Europe, and investments in new vehicle models and regions are anticipated to support future revenue growth and ensure CO2 compliance, improving earnings stability.

Volkswagen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Volkswagen's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 4.6% in 3 years time.
• Analysts expect earnings to reach €16.2 billion (and earnings per share of €31.84) by about November 2027, up from €12.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €20.3 billion in earnings, and the most bearish expecting €10.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.8x on those 2027 earnings, up from 3.5x today. This future PE is lower than the current PE for the GB Auto industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.2%, as per the Simply Wall St company report.

Volkswagen Future Earnings Per Share Growth

Risks

• Volkswagen's operations in China saw a decline in volumes, with a highlighted 10% year-over-year drop and a 15% decline in the third quarter. This decrease in the market could pressure revenue growth and profitability from that region.
  
• The increase in competition and demand shifts towards BEVs and specifically PHEVs in China adds risk to Volkswagen's market share and could impact future revenues negatively if not addressed adequately.
  
• Margins and earnings potential are under pressure as indicated by a 29% decline in profit before tax and a 31% decline in profit after tax. This highlights potential risks in meeting future financial targets and sustaining investor confidence.
  
• Volkswagen is dealing with challenges in its German operations due to high costs, suggesting a need for restructuring. If unresolved, it could continue to pressure net margins and financial performance.
  
• The ongoing negotiations regarding potential restructuring or plant closures in Germany could lead to significant one-time costs or operational disruptions, negatively impacting net cash flow and earnings stability.

Valuation

• The analysts have a consensus price target of €117.64 for Volkswagen based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €180.5, and the most bearish reporting a price target of just €84.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €352.4 billion, earnings will come to €16.2 billion, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €85.78, the analyst's price target of €117.64 is 27.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.