VW Valuation Project
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NOTE TO POTENTIAL INVESTORS As of October 2013 Valentin ROUSSEL for Professor MOSCATO Table of contents Abstract ................................................................................................................................................... 2 Company overview .................................................................................................................................. 2 Industry overview .................................................................................................................................... 7 Valuation using the Dividend Discount Model ...................................................................................... 13 Valuation using the Relative Valuation ................................................................................................. 18 Recommendations ................................................................................................................................ 20 References ............................................................................................................................................. 21 1 Abstract This paper gives a valuation of Volkswagen AG using the dividend discount model and the relative valuation. The goal is to provide to investors a precise and truthful valuation of the company. We will mainly use quantitative data to assess if Volkswagen is a good stock to buy. Company overview Brief history Volkswagen is a German car manufacturer born in the beginning of last century. The first chassis was introduced in 1925 as a platform for a “people’s car”. The idea was inspired an American pioneer, Ford. Under the British Military Government after WWII, the company continued its activity providing Europe with engines and cars. VW starts its internationalization after 1950 thanks to its mass production. The Beetle will be a key success car brining recognition to the company. An M&A strategy allows the group to take advantages of opportunities offered in emerging and mature markets in the mid-1980s. A global production network is built. The Volkswagen group is still operating thought the same strategy: acquiring brands and lowering production costs to increase its market share. It is now the biggest carmaker in Europe.1 Constitution Company’s culture Volkswagen AG is the parent company of the Volkswagen Group. Volkswagen AG holds interests in companies as Volkswagen Financial Services, AUDI AG, Porsche AG, Skoda Auto and others. VW AG board of directors is responsible for managing the group. The actual CEO is Prof. Martin Winterkorn, since 2007. He was before Chairman of the Board of management of AUDI AG and spent twenty years in the group in total. The group is expanding its brands (last year with the consolidation of Porsche AG, Man and Scania), which represents now a complete pool of companies. It is able to satisfy consumers looking for urban, compact, sedan, family, premium, luxury and sport cars. It is also able to finance such purchases. This portfolio is more relevant because every brand respects its own culture. A neophyte will not notice that a Seat or Bentley is under a German management. If platforms and engines can be shared for some 1 http://www.volkswagenag.com/content/vwcorp/content/en/the_group/history.html 2 cars, most of them are conserving initial engines, just optimised. Moreover, design is also personal to the brand. As opposed to Fiat-Chrysler which is “rebadging” its cars in North America with Chrysler and in Europe with Fiat, providing Fiat vehicles which are in fact disguised Chrysler ones 2. Brands Volkswagen group is diversified in products (Cars, motorcycles, trucks) and segmentation (accessible range, middle class, premium, luxury and sport). Key figures Main figures 3 2008 2009 2010 2011 2012 Sales (in million €) 113,808 105,187 126,875 159,337 192,676 Profits (in million €) 4,753 960 6,835 15,409 21,717 Market capitalisation (in million €) 80,220 45,983 49,263 48,221 77,315 Employees (000' employees) 357 367 400 502 550 Financial ratios 2008 2009 2010 2011 2012 Return on Equity 11.89% 2.57% 15.87% 27.50% 29.92% Price-to-Earnings 20.94 32.10 6.97 3.13 3.50 Price-to-Sales 0.87 0.29 0.38 0.30 0.39 Price-to-Book value 2.84 0.87 1.04 0.84 0.98 Dividend Yield 0.77% 2.08% 2.08% 2.89% 2.15% 2 http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/publications.acq.html/archive- on/icr-financial_publications!annual_reports/index.html 3 Same source 3 Market capitalisation almost reached its pre-crisis level, but the strong increase last year (60%) is questionable compared to growth in sales (20%) and profits (40%). It can be a hint for an increase in intangible assets, book value (P/B ratio) or an overvaluation, what we will investigate in the valuation part. The dividend yield is constant, while sales and profits are increasing: it is a proof of the implementation of Volkswagen strategy. Value is created but shareholders may require an increase in dividend pay-out. Market shares 4 Worldwide, the group is present in all markets. Its main one is Western Europe, coherent with the group’s core activities. If it is present in emerging markets, we notice the lack of presence in North America. It is one of the main goal for the firm, and clearly stated in the annual report as an opportunity. In Europe, VW group conserves its position (24.5% market share in 2012), followed by PSA (11.7%), Renault (8.4%), GM (8.0%) and Ford (7.6%). 5 4 http://www.volkswagenag.com/content/vwcorp/content/en/the_group/key_figures.html 5 http://www.acea.be/news/news_detail/new_vehicle_registrations_by_country/ 4 Strategy General “Our pursuit of innovation and perfection and our responsible approach will help to make us the world’s leading automaker by 2018 – both economically and ecologically.” 6 Through this quote, the group wants to increase unit sales by more than 10 million vehicles per year. An increase production capacity can help Volkswagen to reduce its cost per unit, increase their margin or sell at slightly lower price, which will increase sales or/and their profit. The investment plan (€50.2 billion between 2013 and 2015) is concerning purchase of property, plant and equipment and an increase in production capacity. Overall, the group will base its development on core values as: - Improving quality through acquired brands. - Developing new models on common platforms - Increasing R&D in environmental and technologic Key success factors Volkswagen group can rely on its core competitive advantages as 7: - Price competitivity: same platforms used, control of production and research and development costs, - Efficient segmentation: range diversification while keeping brands culture, - Management internationalization, shared culture and knowledge, - Investment capacity due to M&A, - Quality standards and rigor: brand culture and recognition. 6 http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/publications.acq.html/archive- on/icr-financial_publications!annual_reports/index.html 7 http://www.volkswagenag.com/content/vwcorp/content/en/the_group/strategy.html 5 SWOT Analysis Volkswagen group is involved in a competitive industry where any advantage in brand image, technology, segmentation, cost control can make it earn market shares and increase sales. A SWOT analysis is a good way to picture those dynamics: Strengths 8 Weaknesses Global market Presence (between developed and North American market weak presence, emerging), Highly competitive market, Strong and strategic brand portfolio, Less technological improvement than Intangible assets synergy, platforms systems, competitors, Sales level, Efforts to be made in environmental impact. Brand and group recognition, Quality of products, General Financial Situation. Opportunities Threats Emerging markets market share increase, Global recession and other crisis threat, Strengthen its presence in North American Saturated market and raise of new competitors market, enjoy a growing economy, from the east (Chinese, Korean), M&A helping reducing production costs. Environmental regulations, Risk of self-concurrence inside the group, Exchange rates, Rise of oil prices. Volkswagen group is an international actor with a strong business model. Its diversified portfolio and range development provided a better resistance in recessions (also thanks to its financing segment). But industry threats can hit this trend. Environment characteristics are explained in the following part, industry overview. 8http://www.volkswagenag.com/content/vwcorp/info_center/de/talks_and_presentations/2013/09/Investor_ Day_Mr_Poetsch.bin.html/binarystorageitem/file/2013-09- 09+Volkswagen+Investor+Day_P%C3%B6tsch_WEBSITE_final.pdf 6 Industry overview Brief presentation Automotive car industry never stopped to develop economically during the 20 th century in mature and emerging markets. In 2011, passenger car sales reached 60 million, a level never reached before 9. In 2012, 65 million was recorded. But the majority of this performance is due to emerging markets (South- East Asia, China, BRIC countries, other Latin America and Africa areas) 10 . World sales - Emerging vs. Developed markets 70 000 000 60 000 000 8% 6% 50 000 000 24% 12% 13% 5% 5% 40 000 000 30 000 000 20 000 000 10 000 000 0% 1% 1% 2% -8% -8% -2% 0 2005 2006 2007 2008 2009 2010 2011 2012 TOTAL DVLP TOTAL EME Some car manufacturers are enjoying this growth expanding their activities in those areas. In valuation terms, an automaker keeping its presence in developed markets while