Volkswagen: Investor Day Highlights Value Over Volume in Responsibility Shift to Brands for Results

We are maintaining our EUR 338 fair value estimate for the ordinary and preferred shares of Volkswagen VOW after management held an investor day to present its new strategic plan to accelerate the transition to e-mobility and digitalization. The company says its steering model is based on profitable value creation over volume growth, lower fixed costs, and disciplined investment. The group executive board will set the financial targets for the brands. However, for the first time, the individual brands will be responsible for developing a performance program, with brand management teams’ compensation including incentives to achieve financial targets. We like that the brands will have more autonomy to execute strategy and more accountability for results.

Management targets group annual sales growth of 5%-7% through 2027 and thereafter “aligned with industry developments.” Volkswagen also targets EBIT margins of 8%-10% in the midterm and 9%-11% by 2030. We expect midterm profitability to be aided by operating leverage from industry volume improvement. While we think a 9%-11% EBIT margin is possible, we also believe the industry will remain highly competitive, and as automakers become more efficient at producing electric vehicles, margins could revert to historical means.

Our model assumes 5% annual consolidated revenue growth to 2027. We assume a 7.5% group EBIT margin in 2023 due to prevailing industry headwinds like the chip crunch, rising interest rates, inflationary cost pressures, the Ukraine war, and a possible recession in major auto markets. We forecast margin expansion to 8% in 2025, then a contraction to a 6.0% normalized midcycle EBIT margin in year five, in line with the 15-year group median. Despite our conservative assumptions (relative to management’s targets) that result in our valuation, the 5-star-rated ordinary and preferred shares of Volkswagen currently trade at 54% and 63% discounts to our EUR 338 fair value estimate, respectively.