4 Strong Reasons Why Volkswagen Has Enormous Growth Potential

Volkswagen has traveled many bumpy roads in the past and there could be more ahead... but there’s no doubting the company’s bullish future prospects.

Mar 12, 2014 at 11:50AM

Volkswagen (NASDAQOTH:VLKAY) retained its position as the third-largest auto manufacturer in the world in 2013, trailing behind leaders Toyota and General Motors. The gaps between the biggest three are trivial, particularly that between GM and Volkswagen. The German auto giant is aspiring to take the world's lead by 2018.

The company often slips off the radar of American investors as the U.S. is one of Volkswagen's smaller markets, but it has a solid footprint in China, and obviously, Europe. It's the top seller in both markets. While it's too early to say if Volkswagen would fulfill its dreams of ruling the world by 2018, here are four solid reasons that vouch for its growth prospects.

1. Revival of the European auto market
After registering declines for the past six straight years, the European auto industry is now headed for a 2%-3% gain in 2014. Auto analysts are optimistic and hoping for a broader recovery because of the sales growth noticed in the past five consecutive months. According to Jonathon Poskitt, a research analyst at LMC Automotive, unemployment levels could moderate by mid-2014, which in turn could drive an upside in the industry.

Volkswagen has played a big role in the recent improvement -- it posted 8.9% sales growth in January, while the industry averaged 5.5% increase. If demand holds up, Volkswagen can continue to outperform the market, leveraging its strong brands like VW, Audi, Skoda, and Porsche.

The positive market sentiments are also reflected in BMW's (NASDAQOTH:BAMXF) sales numbers. The world's largest luxury-car maker grew its Europe sales by 1.4% in January. Ford (NYSE:F) registered 8.8% sales growth in the first month of the year, and announced a production hike of the Fiesta models in its German plant to meet the increased demand.

Volkswagen factory in Wolfsburg, Germany. Source: Volkswagen

2. Scania acquisition
This past month, the German auto giant offered a hefty $9.2 billion (6.7 billion euros) to own a 100% stake in Scania, a Swedish automaker specializing in heavy trucks and buses. Currently, Volkswagen, along with its subsidiary MAN (a truck maker acquired in 2011), holds roughly 62.6% of Scania's equity.

The Scania acquisition strengthens Volkswagen's position in the European commercial vehicle market, and could add 650 million euros in annual operating profit in another 10-15 years.

3. Luxury brands are doing well
Volkswagen's Audi occupied the second spot in the global sales tally for luxury cars in 2013. Audi sold 1.58 million cars, and narrowed the gap with market leader BMW, which sold 1.67 million.

Research firm IHS Automotive expects Audi to take the world's lead in luxury autos by 2017-2018, driven by the new model launches, particularly the Q5 compact SUV. But the lead could be short-lived, as BMW is ready to showcase its i8 plug-in hybrid sports car, four-door MINI Clubman concept car, and the Active Tourer minivan in order to retain its crown.

The Audi and Porsche brands are selling well in the U.S., currently the largest market for luxury cars. This February, Audi's sales were at a record high for 38 consecutive months as demand for models like A6, A7, A8, and Q7 grew. Porsche sales reached 3,232 units in February driven by higher demand for its Cayenne model. Volkswagen is adding the Macan compact SUV to its Porsche brand, which will hit the U.S. market this spring. Dealers are speculating that Porsche sales could go up to 50,000 units this year driven by the new Macan.

Audi A1 Sportback. Source: Volkswagen

4. Big opportunities in China
Volkswagen has taken the sales lead in the world's largest auto market, China, which offers numerous opportunities. The country's low car ownership rate of roughly 80 in 1000, and the growing level of disposable income is luring global carmakers to invest heavily and grab greater market share.

But Volkswagen has no intentions of relenting as it's aiming to invest $25 billion (18.2 billion euros) and produce more than 35 models locally by 2018. Ford, the late entrant in China, is also stepping on the gas and recorded a massive 49% sales growth in 2013.

China's ardent focus on electric cars could be an added advantage for Volkswagen as it expects to launch 15 new electric car models by 2018 in the country. Although the European automaker entered the electric vehicle market later than its rivals, there will be ample room to explore as China expects more than 5 million electric cars on roads by 2020.

e-up!, Volkswagen's electric model. Source: Volkswagen

Summing up
Volkswagen's ambitious 2018 target may or may not see reality, but the automaker is all poised to gain from the European market revival, the China lead, and a greater footprint in commercial vehicles. The German carmaker's huge luxury portfolio is going from strength to strength not just in Europe but also in the U.S. So, the future definitely holds a lot of promise for Volkswagen, but whether the top seller crown will be a part of it, only time can tell.

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ICRA Online has no position in any stocks mentioned. The Motley Fool recommends BMW and Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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