Volkswagen “hold”

04/20/07 - AC Research

LONDON, April 20 (newratings.com) – Analyst Henning Wagener of AC Research reiterates his "hold" rating on Volkswagen (VOW).

According to AC Research’s research note dated April 19 and published this morning, the company has reported its 1Q07 earnings. In that period, Volkswagen could increase its sales revenues by 5.1% y/y to €26.64 billion. Operating profits at the same time were up 81.1% to €1.085 billion. Earnings before taxes from continued operations improved from €412 million in the first quarter of 2006 to now €1.069 billion. Earnings after taxes rose from €327 last year to now €740 million.

The presented results were ahead of the estimates, the analyst mentions. The massive increase in earnings may above all be attributed to the restructuring-related costs incurred in the first quarter of 2006, amounting to about €400 million. Those costs were countered by about €300 million in revenues from the sale of subsidiaries. Now the company is beginning to benefit increasingly from the restructuring efforts of the recent past, which had clearly boosted the company’s productivity.

At the same time, Volkswagen also reconfirmed its 2008 earnings target. The company plans to realize at least €5.1 billion in earnings before taxes in the year. For the current year, Volkswagen continues to expect operating profits that will be higher than last year’s level of €4.38 billion, not considering special effects. Against the backdrop of the continuing restructuring efforts, this target may well be reached.

At Wednesday’s closing price of €115.22 and a 2008 P/E ratio of about 14, the company’s stock still seems to enjoy a rather adequate rating. In the course of further increases in Volkswagen’s efficiency, there seems to be some additional potential for the company to improve its profits. Moreover, with 7.9% growth in vehicle sales to 1.47 million, Volkswagen reached a very positive first quarter result. The analyst adds, however, that it will be rather difficult to keep such a distinct growth rate over the entire fiscal year. At the same time, measures introduced to reorganize the company, such as job cuts and higher working times without compensatory wage increases, are expected to continue their positive impact. The current Porsche takeover bid of €110.92 per share lends support to the company’s share price.

AC Research reiterates its "hold" rating on Volkswagen.