ii view: Volkswagen issues second profit warning

Trading update

• Now expects full-year 2024 revenue of €320 billion, down from €322.3 billion in 2023 and a cut from a previous forecast for growth of up to 5%
• Now expects full-year profit of around €18 billion

ii round-up:

German car maker Volkswagen AG (XETRA:VOW) slashed annual sales and profit estimates, a second reduction since early July.

VW now expects full-year vehicle deliveries of around 9 million, down from 9.24 vehicles in 2023 and a cut from management’s previous forecast for a 3% increase. Newly expected full-year revenue of €320 billion represents a 1% year-over-year fall, with a predicted profit margin of 5.6% down from 6.5-7%. That potentially generates 2024 operating profit of €18 billion, below current City forecasts of €21 billion. 

Shares in the DAX company fell around 3% in European trading having come into this latest news down 11% year-to-date. Ford Motor Co (NYSE:F) and Porsche Automobil Holding SE Vorz-Inhaber-Akt stimmrechtslos (XETRA:PAH3) are down by similar amounts. Tesla Inc (NASDAQ:TSLA) has risen 5% in 2024 and the DAX index itself almost 16% year-to-date. 

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Along with Volkswagen itself, other group brands include Audi, Skoda, Seat, Cupra, Lamborghini, Scania and Ducati. Management blamed developments at the core VW passenger and commercial vehicle businesses for the cuts to forecasts, as well as a deterioration in the macroeconomic environment. 

In early September, Volkswagen scrapped a range of worker agreements including a guarantee of jobs until 2029 at six German factories.

A difficult business environment outside of Europe at its Financial Services division, offering loans to customers to buy vehicles, also impacted performance. Full-year profit at the division is now expected to come in at around €3.2 billion, down from management’s previous hopes of €4 billion.  

Full-year automotive related cash flows are now tipped to come in at around €2 billion, down from a previous €2.5 to €4.5 billion. First-half results to late September are scheduled for 30 October. 

ii view:

Started in 1937 and headquartered in Wolfsburg, Germany, VW today employs around 680,000, of which around 300,000 are located across Germany itself. Vehicles ranging from passenger cars to motorbikes and heavy trucks are sold in more than 150 different countries. As well as retaining a shareholding in the previously wholly owned Porsche Group, other interests include a joint venture with US EV maker Rivian Automotive Inc Class A (NASDAQ:RIVN) and a shareholding in China’s owner of the MG brand SAIC.   

For investors, a tough economic backdrop for consumers including high borrowing costs is dampening demand. Lower wages in countries such as Mexico and China are likely placing a spotlight on generally higher European staff costs. Lower cost carmakers in China having been targeting expanding sales in Europe and the US, while industry-wide uncertainty over the dominant fuel type in future has left VW covering all bases.   

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To the upside, the diversity of the group’s brands regularly helps to even out the ups and downs of each. A previously announced joint venture with Rivian could see R&D spending on vehicle software and architecture being saved, reinforcing VW’s wider focus on costs and its ten-point efficiency plan. New and upgraded model launches this year persist, while a forecast dividend yield of over 6% is not to be ignored. 

In all, this giant of European automotive manufacturing remains a force to be reckoned with. That said, more cautious investors are likely to await an upturn in sales and profits before making any decisions. 

Positives: 

• Strong brand names including Audi and Volkswagen
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• High EV competition

The average rating of stock market analysts:

Buy