On Wednesday, RBC Capital downgraded Volkswagen AG (ETR:VOWG) (VOW:GR) (OTC: OTC:VWAGY) from Outperform to Sector Perform, adjusting the price target to €100.00 from the previous €102.00. The revision reflects the analyst's projections of the automotive company's earnings before interest and taxes (EBIT) margins aligning with the full-year guidance of 5.6%.
However, when considering special items amounting to €1.3 billion, the implied margin for 2025 could reach 6.6%, based on second half of 2024 levels.
Despite these adjustments, RBC Capital anticipates that Volkswagen (ETR:VOWG_p) may incur €1-2 billion in CO2 pooling and fines, which would bring the 2025 margin estimates back down to between 5-5.5%. Consequently, the firm's 2025 EBITDA forecast is set at €32 billion, marking a decrease of 7.7% from the 2024 projection and 20% from the 2023 figure.
The price target of €100, which indicates a modest 13.5% potential upside from current stock levels, is derived by applying a 1x multiple—considered a trough multiple—on the forecasted 2025 EBITDA. This multiple is on the lower end of Volkswagen's historical trading range of 1-3x.
The use of a trough multiple by RBC Capital is justified by the belief that Volkswagen is at a peak volume level and margins could remain structurally lower unless significant restructuring occurs or European governments, particularly Germany, reinstate incentives to bolster electric vehicle (EV) demand. The analyst concludes that without these changes, a more cautious stance is warranted.
In other recent news, Volkswagen AG reported mixed financial results for the first nine months of 2024, with a slight increase in revenue but a significant drop in profits. Despite a robust order intake in Western Europe, profits were impacted by restructuring charges and a decline in the profit after tax by 31% to €8.9 billion. The company's earnings per share also fell by 33% to €15.2.
In other developments, the U.S. government has expanded its authority over foreign real estate acquisitions near American military bases, affecting various companies, including Volkswagen AG. The Treasury Department's regulation now includes approximately 60 additional facilities spanning 30 states under its purview.
The Committee on Foreign Investment in the United States (CFIUS) now oversees transactions around roughly 227 military sites. This move aims to deter and stop foreign adversaries from threatening U.S. Armed Forces, including through intelligence gathering. In a specific case, the Treasury decided against retroactive application of the new rule for a proposed battery plant by Gotion, a company in which Volkswagen AG is the largest shareholder.
InvestingPro Insights
Recent data from InvestingPro provides additional context to RBC Capital's downgrade of Volkswagen AG. The company's P/E ratio stands at a low 3.49, with an even lower adjusted P/E of 3.04 for the last twelve months as of Q3 2024. This aligns with RBC's application of a trough multiple, reflecting current market skepticism about Volkswagen's future earnings potential.
InvestingPro Tips highlight that Volkswagen is "trading at a low earnings multiple" and is "trading near its 52-week low," which corroborates the cautious outlook presented in the article. The company's revenue for the last twelve months as of Q3 2024 was $361.27 billion, with a modest growth of 4.24%. However, the quarterly revenue growth for Q3 2024 showed a slight decline of 0.47%, potentially supporting concerns about peak volume levels mentioned by RBC Capital.
Despite these challenges, Volkswagen maintains a significant dividend yield of 6.58%, which could be attractive to income-focused investors. InvestingPro offers 11 additional tips for Volkswagen, providing a more comprehensive analysis for those seeking deeper insights into the company's financial health and market position.
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