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A Good European Stock to Consider

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Volkswagen Group (NASDAQOTH: VLKAY  ) , parent of the iconic brands Volkswagen, Audi, Bentley, Bugatti, Lamborghini, and Porsche, is a tough nut to crack. Unfazed by the prolonged recession in Europe, the company is eyeing the position of "world's largest auto seller" by 2018. It intends to beat Toyota (NYSE: TM  ) and General Motors (NYSE: GM  ) to establish its supremacy. Despite the challenges in its core European market, the company's first-half performance and solid July numbers testifies to its underlying strength.

Outperforming the global auto market

Being Europe's biggest automaker has not been an enviable job for Volkswagen lately. In the first half, markets in France and Italy shrunk by more than 10%, while Germany and Spain contracted 8% and 5%, respectively. The U.S. and China were the only two bright spots in the global automotive scene, growing by 7.5% and 12% respectively.

According to Volkswagen's estimates, it outperformed the 3.6% growth in the global auto market in the first half. Its deliveries were up 5.4% to 4.8 million vehicles. Operating profit, however, fell 12% to €5.78 billion as the company booked charges in its truck business and went through a big product recall in China.

Eyeing the No. 1 spot

Volkswagen is chasing its goal is to sell 10 million vehicles annually by 2018. In the first half of the year, the company ranked No. 3 worldwide with its global sales tally of 4.7 million vehicles. Toyota sits tight at No. 1 with 4.91 million vehicles, followed by GM with 4.85 million vehicles.

But Volkswagen has the fastest growth rate among the three. It grew at a pace of 5.5%, faster than GM's 4%, while Toyota posted a decrease of 1.1%.

Tough race

Volkswagen's quest for the auto-sales pole position won't be an easy one -- it's facing off against two formidable rivals.

GM is banking on its excellent sales trends in the U.S. and China. In the first seven months of 2013, North America's biggest automaker increased its sales in the U.S. by 9% to 1.65 million vehicles. The company is benefiting from strong demand for trucks, and has recently launched its new pickup models to a fantastic response. July sales were up 45% for Silverado and 49% for Sierra.

GM is spending $16 billion in the U.S through 2016 as it tries to capitalize on the industry rebound. In China, deliveries were up 11% in June. The company is trying to capture the booming luxury car market through its Cadillac brand.

Toyota has been struggling in China on account of political disturbances between that country and Japan; the company's sales dropped 5.4% in the first seven months. However, Toyota is planning a comeback in the second half, and it remains confident about selling 900,000 vehicles for the entire year, an increase of 7.1% over 2012.

In the U.S., volumes are up 7.5% for the year, largely on account of a fantastic July in which volumes increased 17.3%. Helped by a weaker yen, Toyota has significantly increased incentives for Camry, which had been showing signs of weakness earlier in the year. July sales have predictably rebounded with a 16% increase, and the company is all set to win the midsize race this year.

China and the U.S. will usher growth

Volkswagen's hopes of beating its rivals rest on its Chinese and U.S. performance. The company increased its sales by 19% to 1.79 million in China, and by 10% to 356,800 vehicles in the U.S. during the first seven months of the year.

China is the company's biggest market and also its biggest growth driver. VW holds a market share of around 20% in the country's passenger car market. Its target is to achieve sales of 4 million in China by 2018. To realize this dream, it is building seven new plants and investing $16 billion through 2016.

In the U.S., Volkswagen's main growth opportunity lies in diesel cars. This remains a small market, but with gasoline costs increasing, this segment could grow quickly.

Volkswagen is banking on its new cars to boost sales. It's in the middle of introducing its seventh generation of Golf hatchbacks, and it's likely to bring its new GTI model to North America in 2015. The company has launched the new Gran Lavida sedan in China, which resembles the Passat sold in the U.S. The company is also rolling out the refreshed Audi3 compact.

The MQB platform

Volkswagen is investing heavily in a state-of-the art modular architecture for its cars, known as the MQB platform. This will allow the company to manufacture any kind of vehicle of any shape and size from this common platform, which will reduce costs drastically. According to Morgan Stanley, the roll out of MQB may cost up to $70 billion over the next few years, but the savings that it can generate are mind-boggling. Morgan Stanley's estimates call for a savings of $19 billion annually from 2019, which will boost gross margins to around 10%.

Last call

Volkswagen has shown its worth by withstanding the recession, which crumbled the European auto market. Now, with new cars and huge investments in growing markets like China, the company has set out to conquer the world. Whatever the outcome of that effort, VW's growth seems inevitable. Investors should definitely consider owning a piece of this giant through its American Depository Shares.

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  • Report this Comment On August 30, 2013, at 4:17 PM, MARKETSURFER wrote:

    Let's see. Volkswagen is carrying debt of

    $125 billion and it's Enterprise Value is twice that of it's market cap. No thanks. Think I'll look elsewhere.

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