Volkswagen Earnings: Solid Revenue Growth but Margin Improvement Dented on Headwinds

No-moat Volkswagen VOW reported third-quarter earnings per share of EUR 7.76, beating the EUR 7.07 FactSet consensus by EUR 0.69 and up EUR 0.63 from the EUR 7.13 reported last year. Consolidated revenue rose 12% to EUR 78.8 billion from EUR 70.7 billion a year ago and 3% higher than consensus. Industrial revenue increased 9% on solid pricing, mix, and volume partially offset by output disruption (chips, logistics, flooding in Slovakia), negative currency effect, while consolidated deliveries increased 14% to 1.5 million versus 1.3 million last year when the chip crunch was worse.

Third-quarter group adjusted EBIT of EUR 4.9 billion increased 16% from EUR 4.3 billion last year, while margin expanded 20 basis points to 6.2%. Strong year-over-year margin improvement at Skoda, vans, and Traton were partially offset by supply chain disruption and inflationary cost pressures at Volkswagen brand, Audi, and Porsche as well as mounting losses at Cariad (software group) and battery group for a 5.9% industrial EBIT margin versus 4.6% last year. Financial-services-adjusted EBIT dropped 46% to EUR 775 million from EUR 1.4 billion a year ago due to higher interest rates. Group EBIT missed consensus by 11%.

Management’s unchanged 2023 guidance includes deliveries of 9.0 million-9.5 million vehicles, consolidated revenue of EUR 307 billion-EUR 321 billion, and group adjusted EBIT of 7.5%-8.5%. We estimate volume at 9.2 million and consolidated revenue of EUR 314 billion. We assume 7.5% margin as high uncertainty from industry headwinds remain in 2023. The time value money added EUR 7, raising our fair value estimate to EUR 351 from EUR 344. The 5-star-rated ordinary shares trade at a compelling 69% discount to our new fair value estimate, while the preferred shares are more attractively valued at a 72% discount.