We
expect
Volkswagen’s
[VOW3]
announced
investment
and
joint
venture
with
startup
EV
maker
Rivian
[RIVN]
to
pay
off
in
the
form
of
incrementally
lower
software
investment
requirements.
As
a
result,
we
have
increased
our
Fair
Value
estimate
to
EUR
351
from
EUR
346
per
Europe-traded
preferred
share
of
Volkswagen.
The
estimate,
the
highest
among
sell-side
analysts
tracked
by
Morningstar
Pitchbook,
implies
235%
upside
from
Volkswagen’s
Wednesday
closing
price
of
EUR
104.80.
Management’s
2024
guidance
includes
consolidated
revenue
of
up
to
EUR
338
billion,
and
group
adjusted
EBIT
of
7%-7.5%.
We
estimate
total
vehicle
volume
at
9.2
million
and
consolidated
revenue
of
EUR
312
billion
amid
increased
competition
for
more-affordable
cars.
We
assume
7.1%
margin
as
high
uncertainty
from
industry
headwinds
remain
in
2024.
During
the
past
15
years,
Volkswagen’s
group
adjusted
EBIT
margin
has
had
a
high,
low,
and
median
of
8.1%
(2022),
1.8%
(2009),
and
6.3%.
Our
assumptions
include
an
average
6.8%
adjusted
EBIT
margin
during
our
Stage
I
forecast.
We
assume
margin
contraction
in
the
final
two
years
of
the
forecast
to
our
5.5%
normalized
midcycle
margin,
80
basis
points
below
Volkswagen’s
15-year
historical
median.
While
automakers
may
enjoy
temporary
margin
expansion
as
battery
electric
vehicles
reach
more
optimal
levels,
due
to
the
industry’s
highly
competitive
nature,
we
think
sector
margins
will
remain
within
historical
levels
in
the
long
term.
We
use
a
10.3%
weighted
average
cost
of
capital
to
discount
Volkswagen’s
cash
flow.
An
above
average
systematic
risk
rating,
which
carries
an
11%
cost
of
equity,
results
from
sensitivity
to
economic
cycles
and
unfavorable
operating
leverage
but
with
relatively
lower
financial
leverage.
Our
pretax
cost
of
debt
assumption
is
6.5%,
considering
the
spread
creditors
are
likely
to
demand
given
the
credit
quality.
We
assume
a
long-run
effective
tax
rate
of
22.5%
based
on
the
German
statutory
rate
and
Volkswagen’s
historical
results.
We
weight
equity
at
89%
and
debt
at
11%,
resulting
in
our
10.3%
tax-affected
weighted
average
cost
of
capital.
Volkswagen
Leverages
Its
Scale
With
Rivian
Investment
to
Accelerate
Electric
Vehicle
Platform
Build
We
see
Volkswagen
as
successfully
executing
a
global
automotive
strategy
with
one
of
the
most
aggressive
plans
in
the
industry
to
switch
to
battery
electric
vehicles
from
internal
combustion
powertrains.
A
broad
array
of
brands,
serving
multiple
segments,
reduces
reliance
on
any
one
vehicle
category.
As
one
of
the
world’s
leading
volume
producers,
Volkswagen’s
economies
of
scale
from
common
platforms
across
a
number
of
models
enable
cost
savings
unattainable
by
smaller
competitors.
The
company
owns
premium
brands
Audi
and
Porsche,
ultraluxury
brand
Bentley,
and
the
Italian
exotic
sports
car
maker
Lamborghini.
Whatever
potential
moats
these
storied
brands
offer
are
offset
by
the
mass-market
Volkswagen,
Skoda,
and
Seat
brands,
plus
the
more
cyclical
commercial
vehicle
business.
Prepandemic
and
pre-chip
crisis,
vehicle
deliveries
were
nearly
11.0
million.
In
2023,
VW
delivered
9.4
million
vehicles
globally.
Volkswagen’s
MEB
platform
underpins
its
current
BEV
offensive.
By
the
end
of
2022,
the
company
had
27
BEV
models
derived
from
MEB
and
had
launched
its
unified
battery
cell
strategy
that
targets
80%
volume
penetration
by
2030
and
anticipates
a
50%
entry-level
segment
battery
cell
cost
reduction
as
well
as
30%
savings
in
the
volume
segment.
In
2025,
Volkswagen
expects
BEV
to
account
for
20%
of
global
sales.
Also
in
2025,
the
company
is
to
introduce
its
Scalable
Systems
Platform
for
the
next
BEV
generation
and
on
which
all
brands’
models
will
be
based.
The
new
platform
will
be
fully
digital,
utilizing
the
firm’s
VW.OS
operating
system
developed
in-house
by
Volkswagen’s
Cariad
software
group,
augmented
by
existing
technology
and
future
development
within
the
newly
announced
joint
venture
with
Rivian
to
enhance
VW’s
“software-defined
vehicle”
capabilities.
We
like
that
Volkswagen
has
successfully
pursued
a
common
architecture
manufacturing
strategy.
We
think
the
strategy,
which
increases
economies
of
scale,
will
continue
to
reduce
cost.
However,
the
MEB
common
architecture
strategy
presents
a
risk
if
consumer
demand
for
BEVs
does
not
materialize.
Volkswagen
targets
adjusted
EBIT
margin
of
7%-8%
in
2025,
up
from
its
6.0%
15-year
historical
median.
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