Bloomberg News

Volkswagen Profit Beats Estimates as Porsche Boosts Earnings (2)

October 30, 2013

Volkswagen AG's Ducati Unit

A mechanic works on a Ducati motorcycle, a unit of Volkswagen AG in Bologna, Italy. Photographer: Alessia Pierdomenico/Bloomberg

Volkswagen AG (VOW) posted third-quarter operating profit that beat estimates as the financial contribution from the Porsche sports-car brand surged and the automaker reined in spending.

The shares gained the most in almost 16 months after Wolfsburg, Germany-based VW said earnings before interest and taxes rose 20 percent to 2.78 billion euros ($3.82 billion), exceeding the 2.72 billion-euro average estimate of 10 analysts.

The maker of the 911 sports car, the most profitable of VW’s 12 brands with an 18 percent return on sales, is critical to efforts by Europe’s largest car manufacturer to sustain earnings momentum. Profit from Porsche, which VW consolidated in August 2012, climbed 55 percent to 599 million euros, accounting for 22 percent of the entire group’s earnings.

“Porsche has been showing a great performance since the integration into VW,” said Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany. “They’re bound to continue on this course as they expand the brand’s product lineup and enter new markets.”

VW jumped 5 percent to 183.50 euros at the close in Frankfurt, the biggest gain since July 5, 2012. The stock has climbed 6.6 percent this year, valuing the German carmaker at 83.5 billion euros.

Porsche Profit

Porsche, the world’s most profitable auto brand, is targeting operating profit growth in 2014 as the Macan compact sport-utility vehicle joins the product lineup, Chief Financial Officer Lutz Meschke told Bloomberg this month. Porsche plans to sell more than 200,000 vehicles annually in 2015 or 2016, about three years earlier than planned, on demand for the Macan and the larger Cayenne SUV.

Backed by a premium-car lineup that also includes Audi, Lamborghini and Bentley, Chief Financial Officer Hans Dieter Poetsch reaffirmed today during a conference call with analysts that group operating profit will reach last year’s 11.5 billion euros in 2013 and rise again next year.

“There’s nothing more to speculate about” the forecast VW gave earlier this year, Poetsch said. “That’s what we’ll deliver.”

Audi Target

New vehicles will be at least as profitable as their predecessor models, helped by VW’s modular technology, and there’s “no reason to believe” Audi’s operating profit margin will fall below the brand’s target corridor of 8 percent to 10 percent of revenue, he said.

Manager Magazin reported last month that VW may miss profit goals as costs climb and sales growth slows.

VW, which targets taking the global sales lead from Toyota Motor Corp. (7203) and General Motors Co. (GM:US) by 2018, is working to streamline costs with more sharing of technology among its eight car brands, three commercial-vehicle divisions and the Ducati motorcycle unit. Third-quarter revenue fell 3.8 percent to 47 billion euros on negative currency effects and price pressure in Europe, where auto demand is at a 20-year low.

“We are focusing on disciplined cost and investment management, as well as on further improving all our processes,” Poetsch said earlier in a statement. “This is particularly important, given the fact that the economic environment is not expected to improve in the short term.”

Cash Flow

Net cash flow swung in the third quarter to a positive 3.22 billion euros from a negative 1.4 billion euros last year. Net liquidity jumped 81 percent in the first nine months to 16.6 billion euros. Volkswagen delivered 40,000 more cars than it produced in the quarter, cutting vehicle inventory and reducing spending on parts.

“Cash flow was significantly better than I expected,” Daniel Schwarz, a Frankfurt-based analyst at Commerzbank AG who recommends buying the shares, said in a telephone interview.

The German automaker is rolling out 60 new and updated models this year, including fresh versions of the VW Golf hatchback, and is widening its dealership network in markets such as China, Russia and southeast Asia. Nine-month deliveries in China rose 18 percent, propelling a 4.8 percent global gain.

Operating-profit growth at VW compares with a 16 percent jump in third-quarter Ebit posted by Stuttgart-based Daimler AG (DAI), whose Mercedes-Benz luxury-vehicle division attracted buyers with the CLA compact coupe, E-Class sedan and top-of-the-line S-Class car.

Premium Rivalry

Mercedes ranks third in worldwide premium-vehicle sales, with Munich-based Bayerische Motoren Werke AG leading the segment and Audi placing second. The three companies are all targeting record deliveries this year, with Audi and Mercedes seeking to beat BMW as the biggest seller in the segment by the end of the decade. Global delivery growth at Mercedes in September exceeded gains at Audi and BMW.

Porsche’s higher contribution to VW profit helped prop up the group as other passenger car brands posted earnings that were flat or declined.

Audi’s third-quarter earnings fell 17 percent to 1.01 billion euros. Daimler’s Mercedes-Benz Cars division, which also includes the Smart city-car brand, posted a 23 percent jump in Ebit to 1.2 billion euros. Audi’s operating margin of 9.4 percent still beat Mercedes’s return on sales of 7.3 percent. BMW will report third-quarter figures on Nov. 5.

The VW nameplate’s profit in the quarter edged up slightly to 623 million euros from 621 million euros a year earlier. The Spanish Seat brand, the automaker’s only unprofitable unit, posted a third-quarter loss of 53 million euros, unchanged from a year ago. VW’s Czech marque Skoda reported 128 million euros of operating profit, an increase of 8.5 percent.

“There are many weak spots,” said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler who recommends selling the shares. “Audi’s product momentum is fading, the VW passenger car unit is struggling and the situation at the loss-making Seat brand remains unresolved.”

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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