* Timing is still our key dilemma with VW: The bull case on VW is persuasive – MQB should hit its stride in ‘16, FutureTracks is set to deliver €5bn of savings by ‘17, a raft of new SUVs and more localized product should see the VW brand turnaround in North America beyond ’17 and there is also a substantial FX tailwind coming as hedging rolls in the next few years. The debatable point is when these will hit the P&L and to what degree emerging markets woes (now including China) will offset the positives. We don’t see material earnings progression in 2015, but ’16 and ’17 look compelling. Recently, stalling sales and price cuts in China have spooked the market and whilst we think this is a reflection of the market normalizing, the next couple of months are likely to remain soft. For now we stick to our EW rating and trim our price target on the pfds to €240 while raising the PT on the ords to €240 on the narrowed liquidity discount.
* We think VW is well placed in China, but there are challenges ahead: We continue to believe the China auto market is maturing, becoming more normal as it were. In the short term there are headwinds for VW given sentiment in the premium segment is being dampened by anti-graft investigations and in the mass-market segment cheap, local brand SUVs are taking share. Whilst we think these issues are temporary and largely offset by a sizeable currency tailwind in 2015, we think weakening sales are likely to hold the stock back given how important China is to earnings.
* MQB is working, but EM woes are obscuring the benefits: We remain MQB believers even if there is little evidence of the expected savings in the group’s account thus far. We think that is down to a greater than €2.5bn profit slump thanks to collapsing volumes and exchange rates in Brazil, Russia, Turkey and India. We think there is at least another €500m of headwind in 2015 (this might be light given the CFO indicated it was that much in Q1), but we think the pain eases in 2016 at which point MQB will underpin roughly 3m units and deliver on our estimates €1.5bn of savings.
* Management changes point to changing narrative: On July 1st the VW brand will no longer share its CEO with the group. Dr Herbert Diess joins from BMW to head up the namesake brand and he arrives with a CV that shows particular strength in purchasing and development. In addition new joiner Andreas Renschler is now running all the truck businesses under the one holding company. It is easy to forget that VW is a goliath and changes take time, but there’s a good chance the message for both of these group trouble spots is set to change as the new managers conduct their own reviews.
* Not expensive, but earnings momentum is the key: VW is currently trading on a ’16 EV/Sales of 28%, EV/EBITDA of 2.4x and a PE of 8.1x. All of which are 20-30% below its German peers. Good as this may seem relative to the sector VW’s forward earnings have fallen 6% YTD and the stock has underperformed the sector by the same amount.
In short we continue to believe VW will track the sector until earnings upgrades arrive.