VW'S STOCK: WATCH OUT FOR A BUMPY RIDE
Even if you love the new Beetle, that doesn't mean you should rush out and buy Volkswagen's stock. Europe's largest auto maker has already enjoyed a 30% price jump in its American depositary receipts (ADRs) this year, to around 146. The stock surged nearly 4% on Mar. 10 alone, a day after the company announced record earnings for the year, a dividend increase, and plans to scale back the size of a controversial capital increase.
Yet many analysts remain disenchanted with the company. Volkswagen incurred the investment community's wrath last fall when it announced that it would issue 6 million new shares with little explanation about why it needed the money. On Mar. 9, it said it would instead offer only 3 million shares through a rights offering to current shareholders -- an admission of error, writes Stephen Reitman of Merrill Lynch in a recent report. Still, even at half the size, the new shares will dilute earnings by 4% to 5%, estimates Salomon Smith Barney.
The rights offering may be VW's biggest fumble lately, but some investors also have underlying concerns about the company. Business this year is suffering from delays on the new Golf and problems in Brazil and Asia, where VW does about 25% of its business. Salomon Smith Barney analyst John Lawson recently lowered his earnings estimates for 1997, 1998, and 1999 because of the company's "weaker showing in Europe and emerging-market issues." His recent price target is 1,250 Deutschemarks, vs. the stock's Mar. 12 close at 1327.5 marks.
Analysts agree that the Beetle could provide a boost for VW's position in the U.S. "They can use the New Beetle as a tool to rebuild their brand image," says Lothar Lubinetzki, an auto analyst in London with Enskilda Securities. "It definitely will enhance Volkswagen in the U.S., which is an area they need to strengthen to really become successful." But Beetle fans should keep in mind that potential sales for the new model are hardly overwhelming: VW will build only 100,000 of them, with 50,000 headed for the U.S. and Canada. And of the 4.26 million cars VW sold worldwide last year, only 3.5% were in the U.S.
Lubinetzki, for one, is positive on Volkswagen long-term. He thinks it's making strides to achieve its main goals: cut costs, improve margins, and stimulate sales with new models. He also says VW is the cheapest stock in the sector, based on its price relative to earnings and cash flow.
But Andrew Jacobson, an international portfolio manager at Columbus Circle Investors, a unit of Pimco Advisors, sold his stake last year when he noticed a disruption in the flow of positive news about the company. After doubling his money since 1996, "We just decided to take profits," says Jacobson. "It is a mass producer in a difficult, mature industry, and expectations had run up a lot." Right now he's investing in Porsche instead.
If you side with Lubinetzki, you've got two ways to play it. Volkswagen's ADRs trade over-the-counter in U.S. dollars under the symbol VLKAY. Trading is light compared to U.S. stocks, but for an ADR, it is fairly liquid. Average daily volume for the past 60 days is about 18,000 shares. One share of VLKAY represents exactly one-fifth the price of the ordinary shares.
Most brokers can also purchase German shares (G.VOW) for American accounts. As a rule of thumb, Jeff Gerleman of Charles Schwab & Co.'s global investing services group says the German shares make sense only for purchases over $10,000. And if you buy the ordinary shares, factor in the extra risk of currency fluctuations.
But the biggest risk now is that share prices have already risen fairly sharply on the Mar. 9 news. If you want to invest in the company that's bringing back the Beetle, it may make sense to wait until the current euphoria subsides a bit.
By Amey Stone
Associate Editor, Business Week Online
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