This paper examines the valuation of Volkswagen AG to determine the adequacy of the stock valuation. The company currently has a P / E ratio of 5.78 as of August 2021 (YCharts, 2021). The automotive industry currently has an average of around 10, but many companies in the same sector are at roughly the same level: for example, Kia is under ten, and Mazda is around 16 (Baur & Todorova, 2018). The pandemic impacted all sectors of the world economy, but this indicator now remains relatively at the same level (Romano, 2020).
Only Tesla is significantly out of the list for this indicator, which is explained by the comprehensive media coverage and the development of promising developments beyond electric cars’ technology. According to this indicator, the company is now at a low level, but this often leads to rapid growth, which is confirmed by the jump in March 2021 (Richters, 2021). Given the industry average and the company’s plans for electric factories on various continents, charging points, communications, and autonomous driving developments, the company is currently undervalued.
In order to calculate the book value for each share, the company’s balance sheet for 2020-2021 is used. The total assets of Volkswagen AG are 497,114,000 thousand. Then it is needed to subtract the company’s total liabilities of 368,331,000 thousand; the result is a total equity gross minority interest of 128,783,000 (Yahoo Finance, 2021). Dividing the resulting number by the total number of outstanding shares 501.295, the answer is approximately 256.9.
The current share price of Volkswagen AG is 201 euros, while at the end of 2020, it was approximately 156. The number obtained is significantly higher than the actual value of the shares. The book value of a share is the proportion of the net assets of an enterprise per share. It is a crucial criterion for assessing the activities of an enterprise. The market price of a share is usually higher than the balance price in a successful company. In this case, the company’s securities are undervalued. The market values the enterprise below its book value. By buying securities with such an indicator, the investor understands that he is paying for them less than the actual value of the share of assets attributable to them.
Analysts generally define the company’s shares on the market as favorable for buying. However, they highlight a relatively significant risk, according to the safety rank. As a recommendation, an assessment of the company’s future is proposed, which, in general, is seen as promising against the background of its developments (Obermatt, 2021). According to another report, Volkswagen AG is coping with the chip crisis with dignity, but there are fears in the future about inflation due to rising interest rates and the success of banks (Cohen, 2021). Finally, concerns about the environment in European countries, the difficulties of entering emerging Asian markets, and competition leading to a technology race are not in favor of the company.
However, the company’s successful diversification, also in the luxury market (Strategy Stocks, 2021), forms a solid foundation. International experience, coupled with innovative developments, balance the future perspective with the voiced shortcomings, and in general, it is recommended to monitor all these factors; otherwise, the investment is described as risky. As a guideline, partnerships with other companies in the industry should be monitored, the evolution of innovation, oil and fuel prices, influenced by political factors and laws in emerging markets that tend to restrict overseas companies, as in the case of Volkswagen AG and India.
References
Baur, D. G., & Todorova, N. (2018). Automobile manufacturers, electric vehicles and the price of oil. Energy Economics, 74, 252-262.
Cohen, P. (2021). Opening bell: Markets optimistic ahead of U.S. jobs data; oil rebounds. Investing. Web.
Obermatt. (2021). Volkswagen (XTRA:VOW3). Web.
Richters, K. (2021). Volkswagen global sales jumped in March. MarketWatch. Web.
Romano, F. (2020). Could COVID-19 Lead to another great depression? Evidence from the USA and Australia.
Strategy Stocks. (2021). Analysis of Volkswagen share price. Web.
Yahoo Finance. (2021). Volkswagen AG Balance sheet. Web.
YCharts. (2021). Volkswagen PE Ratio. Web.