Volkswagen shares are priced to motor.
You've always fancied a Lamborghini, haven't you? Course you have. Or maybe a Bentley? Or a Bugatti? What the heck, why not buy all three while you're at it? Go on, treat yourself.
And since you're in a car buying mood, get yourself an Audi as well. And a VW, Skoda and a Seat. They're all available at a big, big discount, if you buy shares in Volkswagen, which owns all these brands.
True, you won't be able to drive away your new automotive investment, but you could proudly park it in your portfolio.
The people's brand
Frankfurt-listed Volkswagen (NASDAQOTH: VLKAY.PK.US) is Europe's largest automobile manufacturer, with 60 production facilities in 21 countries. It sells nine brands in 153 countries, including commercial brands VW Commercial and Scania. You know the name, you trust the brands, and so does everybody else.
They're built by Germans, which is all you need to know. Yet the shares have been knocked more than 25% in recent months.
At the end of July, its shares traded at €137. At time of writing, you would pay €102. Now could be a good time to drive away a bargain.
In the fast lane
Despite the downturn, Volkswagen's profits have speeded up this year, with revenue growing nearly 26% in the first six months of 2011 to €77.8 billion. The group sold more than four million vehicles in a single half for the first time ever. That compares to vehicle sales of 7.3 million in the whole of 2010.
Its share of the global passenger car market rose slightly to 12.4%, while its operating margin rose from 4.5% a year ago to 7.9%. Operating profit increased from €2.9 billion to €6.1 billion as a result.
That's a nifty set of figures, yet Volkswagen is currently trading on a P/E of just 7. This compares to 12 for BMW (NASDAQOTH: BAMXF.PK.US) and for Daimler (NASDAQOTH: DDAIF.PK.US), which have a similar global sales base and premium products than other comparative European car manufacturers.
I was alerted to Volkswagen's potential by a regular contact, a very helpful chap called Dan Dowding at stockbrokers Killik & Co in Dubai. I was writing an article asking different brokers to name their favourite global blue-chip stock, and this was his number one choice. For him, it's the best stock in the world.
He tells me that Volkswagen is trading at a whopping 50% to discount to Toyota (NYSE: TM.US), its most direct global comparative.
Cars and money
VW Group is split into two main divisions -- car production and financial services, such as dealer finance, leasing, insurance, fleet management and direct banking.
Its automotive arm drives around two-thirds of its profits, and financial services banks the other third. Bolting together car building and financial services makes more sense than you think, because it welds customers more closely to the group. Financial services customers tend to change cars more often, an average of 5.5 years versus 7.4 years for cash buyers.
Volkswagen is aiming to cross-sell half of its cars with some kind of financial services product, with significant growth in Eastern Europe, Russia, Asia and Latin America.
You don't need me to tell you that the slowdown in the West is likely to hit demand for new cars. That concern may partly explain recent share price falls.
But the group has been accelerating into emerging markets, which now generate 50% of its sales, half of which go to China. So the group gives you excellent exposure to the growing emerging middle class.
I've never liked the word synergy, but Volkswagen is using it to the max. It is building synergies across its product range, and improving profitability by increased local production and sourcing.
It also owns 49.9% of Porsche, and is planning a full merger. That should bring further synergies, (that word again!) and other add another premium car brand to your portfolio.
Buy it, park it
With a modest dividend yield of 2.1%, this stock isn't for income-hungry investors. The share price may have fallen lately, but it is still above its year-low of €79. And it is of course vulnerable to a slowdown both in the West and emerging markets.
But now could still be a good time to treat yourself to that Lamborghini.
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