Volkswagen Achieving Ambitious Sales Goals At Expense Of Profitability

Mar 16 2014, 12:58pm CDT | by

Volkswagen Achieving Ambitious Sales Goals At Expense Of Profitability
Photo Credit: Forbes Auto

Volkswagen investors must be wondering what is the point of a company which wants to be the biggest auto manufacturer in the world, but every time it sells an extra car it makes less money.

At a recent press conference in Berlin, CEO Martin Winterkorn said VW sales will hit 10 million this year, four years earlier than originally planned. The ambition also entails overtaking Toyota of Japan as world number one in terms of sales, and keeping General Motors in 3rd place.

Volkswagen has an impressive record of boosting sales and grabbing market share. In Western Europe it is market leader with a share of close to 25 per cent. Volkswagen Group sales combine its own VW brand and fellow mass market contenders like Skoda and SEAT. There is also its luxury brand Audi, upmarket sports cars and SUVs at Porsche, top of the range luxury at Bentley and Lamborghini, motorbikes and trucks. But investors are worrying because VW brand profits are stagnating and aren’t likely to gather pace any time soon.

The fact that recently acquired Porsche is proving massively profitable, alongside the premium subsidiary Audi, will probably help to console them though.

In 2013, VW Group operating profit rose 1.5 per cent to 11.7 billion euros ($16.3 billion). Porsche, with its tiny contribution of 155,000 vehicle sales compared with VW brand sales of 4.7 million, provided 2.6 billion euros ($3.6 billion) of operating profit. Audi’s operating profit was close to 5 billion euros ($7 billion).

Analysts attending the event though in Berlin were less impressed with the profits likely to be generated by the sales push to 10 million.

International Strategy and Investing (ISI) pointed out that even if VW Group reaches the high end of its profit projection for 2014 of 13 billion ($18.1 billion), this means operating profits were broadly flat for four years, despite sales increasing from 160 billion euros ($223 billion) to an estimated 205 billion ($285 billion) this year. ISI said if you don’t count Porsche, VW Group operating profits for 2014 would only be 9.7 billion euros ($13.5 billion), 15 per cent below the 2011 level when Porsche wasn’t included.

“Porsche is of course a central part of VW today and taking it out is an exercise…….. We believe the key reason for the disappointment of core VW is the performance of the VW car brand, which is 50 per cent of revenues. We estimate that between 2011 and 2014, the VW brand’s (operating profit) will have fallen by some 30 per cent – from 3.8 billion euros ($5.3 billion) to 2.6 billion ($3.6 billion),” ISI analyst Arndt Ellinghorst said.

Bernstein Research is another VW sceptic, agreeing that VW will make almost the same operating profit in 2014 as it made in 2011.

“VW spent quite a few years building expectations with massive global market share wins and promises of huge MQB (new engineering methods) savings. But the company has had to spend the last 18-24 months deflating these expectations. Warning that profits would be flat in 2013 came as a negative surprise to the market. VW issued exactly the same warning about 2014,” Bernstein Research analyst Max Warburton said.

Warburton said VW remains an impressively profitable company, but without gains in profit, the share price is unlikely to show much progress. Earnings growth requires progress in the still ailing U.S. market, less arduous foreign exchange conditions, big market share gains, or what Warburton called “a proper European recovery.”

ISI’s Ellinghorst sees some major hurdles for VW to jump. These include challenges in emerging markets, foreign exchange exposure, and fixed costs problems while the new product diary looks thin through 2014. Ellinghorst also  points to worries about VW’s U.S. performance.

“VW remains in a difficult position to increase margins this year, and maybe next,” Ellinghorst said.

But there are plenty of VW cheerleaders out there.

Commerzbank analyst Daniel Schwarz pointed out that at the Berlin meeting, the company warned about increasing foreign currency costs, and rising fixed costs, while also lauding the possibilities of rising sales in Europe, low stocks and pricing stability.

Schwarz like the second scenario the best, and recommended that investors buy VW shares./>/>

Source: Forbes Auto

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

Pakistan blocks three Saarc connectivity pacts; Modi, Sharif avoid meeting (Roundup)
Kathmandu, Nov 26 (IANS) Pakistan Wednesday played spoilsport by blocking three major Saarc connectivity projects initiated by India, even as Indian Prime Minister Narendra Modi conspicuously avoided meeting his...
Read more on Politics Balla
 
IS pamphlets distributed in Pakistan
Islamabad, Nov 26 (IANS) Unidentified people have distributed pamphlets of the Islamic State (IS) Sunni radical group in Pakistan's South Waziristan tribal region, residents who have seen the pamphlets said Wednesday...
Read more on Politics Balla
 
Three policemen shot dead in Egypt's Sinai
Cairo, Nov 26 (IANS) A police officer and two recruits were shot dead Wednesday by unidentified gunmen in Arish city in North Sinai province, a security source told Xinhua. "The militants set an ambush for a police...
Read more on Politics Balla
 
Ferguson burns as racial protests spread across US
Washington, Nov 26 (IANS) As night fell, Missouri state in midwestern United States deployed more security forces to quell violence in Ferguson after a grand jury failed to indict a white police officer in the August...
Read more on Politics Balla
 
Indian-origin IS member poses with newborn on Twitter
London, Nov 26 (IANS) An Indian-origin Islamist who skipped bail in Britain to join the Sunni radical group Islamic State (IS) in Syria has posed on Twitter with his newborn son hailing a new "generation" of Islamists...
Read more on Politics Balla
 
Universal picks up Steve Jobs biopic
Los Angeles, Nov 26 (IANS) Universal Pictures has taken over the biopic on Apple co-founder Steve Jobs after Sony Pictures opted out. The news was confirmed by a studio spokesperson, reports hollywoodreporter.com....
Read more on Celebrity Balla
 
'Israel stands with India in its fight against terrorism'
New Delhi, Nov 26 (IANS) Remembering the victims of the 26/11 Mumbai terror attacks, which included four of its citizens, Israel Wednesday said it will always "stand with India" in its fight against terrorism. In an...
Read more on Politics Balla
 
Three killed in eastern Ukraine attacks
Kiev, Nov 26 (IANS) A new round of intense fighting between government troops and independence-seeking insurgents has killed at least three people and wounded five others over the past one day in eastern Ukraine, the...
Read more on Politics Balla
 
When Sharif walks for speech, Modi reads newspaper
Kathmandu, Nov 26 (IANS) The frostiness of ties between India and Pakistan was visible in the Nepalese capital at the 18th Saarc Summit's inaugural session Wednesday. First, Pakistani Prime Minister Nawaz Sharif...
Read more on Politics Balla
 
Lorde, Lena Dunham most important for Taylor Swift
Los Angeles, Nov 26 (IANS) Singer Taylor Swift finds fellow celebrities Lorde and Lena Dunham the "most important" people in her life at the moment. The 24-year-old has praised her friends -- singer Lorde (real name...
Read more on Celebrity Balla