Volkswagen Earnings: Commodity Hedging Masks Underlying Solid Performance From Pricing and Mix

No-moat Volkswagen VOW reported first-quarter earnings per share of EUR 8.43, handily beating the EUR 6.84 FactSet consensus by EUR 1.59 but down EUR 4.68 from the EUR 13.11 reported last year. Commodity hedging valuation effects added EUR 3.2 billion to operating profit in the prior year but reduced current quarter operating profit by EUR 1.3 billion. Even so, consolidated revenue jumped 21% to EUR 76.2 billion from EUR 62.7 billion a year ago, beating the consensus by 5%. Industrial revenue increased 24% on strong pricing, mix, and volume partially offset by continued but lessening chip shortage disruption, while consolidated deliveries increased 23% to 1.5 million versus 1.2 million last year when the chip crunch was much worse.

First-quarter group adjusted EBIT of EUR 5.7 billion dropped 32% from EUR 8.5 billion last year while margin contracted 600 basis points to 7.5%. Excluding commodity hedging revaluation, adjusted EBIT would have jumped 35% to EUR 7.1 billion for a 9.3% margin versus EUR 5.2 billion and an 8.3% margin in the prior year. Improved results at Skoda, Seat, commercial van, components, and Traton were offset by Volkswagen brand and Audi, resulting in industrial adjusted EBIT including hedging of EUR 4.76 billion versus EUR 6.95 last year. Financial services adjusted EBIT dropped 34% to EUR 1.0 billion from EUR 1.5 billion a year ago due to higher interest rates.

Management’s unchanged 2023 guidance includes deliveries of about 9.5 million vehicles (2022 6.1 million), consolidated revenue of EUR 307 billion-EUR 321 billion (2022 EUR 279 billion), and group adjusted EBIT of 7.5%-8.5% (2022 8.1%). We estimate volume at 9.4 million and consolidated revenue of EUR 314 billion. We assume 7.5% margin as high uncertainty from industry headwinds remain in 2023. The 5-star-rated ordinary shares trade at a 55% discount to our unchanged EUR 338 fair value estimate, while the preferred shares are more attractively valued at a 63% discount.