What Electric Vehicles Mean for Volkswagen's Margins

No-moat rated

Consolidated revenue, which includes financial services, increased 6% to EUR 230.7 billion compared with EUR 217.3 billion last year. However, operating profit excluding special items was at an all-time record for the group at EUR 17.0 billion, resulting in a 7.4% operating return on sales. The operating result was 17% higher than last year and represented a healthy 70-basis-point expansion in margin.

Volkswagen’s Roadmap E strategic plan to implement electric powertrain vehicles includes making electric vehicles in 16 different global locations by 2022, 80 new electric models, and annual production volume of 3 million electric vehicles by 2025. Our EUR 221 fair value estimate includes margin contraction for higher investment in powertrain electrification. Volkswagen’s 10-year historical median EBITDA margin, which includes Chinese JV equity income, is 14%. We assume a 13.0% normalized sustainable midcycle EBITDA margin, 100 basis points below the 10-year median. Total capital expenditures and capitalized development spending as a percent of revenue for the past 10 years has averaged 8%. Our Stage I forecast total capital spending averages 10% of revenue.

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