Vroom Vroom Volkswagen!
Sharon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing guru Peter Lynch claims he makes great investments from noticing the products friends and family use. From the back of our vintage Toyota wagon, our 9-year-old car aficionado has been pointing out new Audis and Porsches with increasing frequency, and it turns out that’s no fluke: Volkswagen (NASDAQOTH: VLKAY), the German company that owns those brands, has seen its U.S. car sales increase by 30% from January through July this year.
Yet its stock is trading at just over 3 times earnings. Despite financial strength, good growth prospects, product diversification and quality products, VW stock apparently is getting hammered just because the company’s HQ is in Europe, land of scary financial headlines. While our family can’t swing a Veyron, a ride with Volkswagen could be a bargain. Here’s why:
Building on a solid balance sheet. Low P/Es can be warning signs that a company’s financial engine is knocking badly. That’s not the case for Volkswagen. At year end 2011, revenues had grown 51% and net income was up a huge 1500% since December 2009. For the first six months of this year, revenues are up 23%. That’s pretty decent acceleration.
At the end of June, the company had nearly US$27 billion in cash on its balance sheet. Volkswagen effectively translates sales into cash, with a cash flow margin of 67.1%. Debt is low. So the company has the fuel to continue its expansion plans as well as handle the rough ride many European consumers are giving automakers on that continent.
Strong international growth with room for more. Volkswagen’s “Strategy 2018” goal is to sell more than 10 million passenger cars a year by doing exactly what it’s doing: gaining customers around the world.
Compared to the first seven months of last year, sales were up more than 25% in Central and Eastern Europe; up almost 22% in North America; up 5.3% in South America; and up 17.3% in Asia Pacific, with big sales jumps in China and Japan. Sales are booming in Russia, with sales of Volkswagen branded passenger cars up 69.2%, and those of Audi up 40.1%. Volkswagen now claims 12.4% of the worldwide passenger car market.
As other carmakers talk about leaving their European production facilities idle after the summer break, Volkswagen kept up production in Europe throughout the summer to meet demand for its Golfs and Jettas elsewhere in the world. The company also announced in late August it’s building a transmission plant in China and an engine plant in Russia.
Diversified product line. The company’s Volkswagen and 11 other brands appeal to a range of budgets, needs and tastes. Some brands are specifically designed for regional markets, like the New Lavida for China. For the rich, famous and fictitious (hello, Tony Stark!), the company offers the upscale Audis and the luxury Porsche, Bentley, and Lamborghini lines, sales of all of which are up. Bugatti sales are even.
Sales of VW commercial vehicles were up 4.7% the first seven months of the year. Volkswagen also owns large stakes in MAN and Scania, which make heavier trucks and buses.
Quality products. Volkswagen’s US group recently took top overall honors in a car owner quality poll. Various Volkswagen and Audi models show up on many “Editor’s Choice” lists in Car and Driver, too.
The company recently opened a $27 million test and research facility in California that will focus on engine technologies and emissions reduction across its product lines—factors the company says are key to achieving its international sales goals.
What are the downsides? Volkswagen itself notes that economic growth in most of its target markets is slowing, which could affect sales. Although sales increased 4.4% in Germany, sales dropped off by almost 6% throughout Western Europe the first half of this year.
The company also faces stiff international competition in the lucrative Brazilian, Russian, Indian and Chinese (BRIC) markets. Toyota (NYSE: TM) is opening a production plant in Brazil this year and, like Volkswagen, markets models designed especially for local tastes. This carmaker enters new markets with a customizable set of light trucks, SUVs and family cars, which square off against Volkswagen’s comparable offerings.
General Motors (NYSE: GM) is another contender, being the largest foreign car maker in China through a variety of local subsidiaries. It also intends to invest $1 billion in its Russia-based factories by 2018 so it can pump out 350,000 vehicles there each year.
That said, Volkswagen has already added to its sales and market share as it goes against these competitors in tough economic times. Its main problem seems to be that it is a European company, and so its stock price could be driven down further simply on the strength of more bad European financial news while the herd ignores evidence of the company’s soundness.
The bottom line: Buying into Volkswagen now could be like driving a Beetle off the lot, then watching it steadily transform into a Boxster in your driveway.
Fool blogger Sharon Watson has an interest in a household account owning shares of Volkswagen. The Motley Fool has no positions in the stocks mentioned above. 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.