Europe is no bugaboo for VW

Scorching 2011 results prove Volkswagen's German engineering rules.

By InvestorPlace Feb 27, 2012 10:58AM

By Jim Woods, Stocks & Markets Contributor


In a recent story on General Motors (GM) and PSA Peugeot Citroen (PEUGY), I offered my thoughts on the purported deal between the two, which is clearly aimed at staunching the bleeding from their respective losses in Europe. But on Friday, rival automaker Volkswagen AG (VLKAY) showed that a European-based carmaker can drive fast regardless of treacherous economic roads in its home region.

 

Volkswagen reported robust preliminary earnings results for 2011, announcing that it sold more than 8 million vehicles last year, an all-time record for the 75-year-old German company. VW already is atop the heap when it comes to European automakers, and as a result of last year's sales surge, it has taken over the No. 2 spot on the list of world's largest car companies. GM currently is No. 1, after passing Toyota Motor (TM), which struggled to recover from supply-chain problems caused by the earthquake and tsunami in Japan in March of last year.

 

Volkswagen said its 2011 net income more than doubled to 15.4 billion euros, or $20.6 billion. That's up from the 6.84 billion euros earned the prior year. By comparison, GM's 2011 profit was about one-third less, coming in at just $7.6 billion.

 

Perhaps more important, the company increased revenue nearly 26% in 2011 to 159 billion euros. In terms of unit sales, VW saw a 14.7% surge from 2010 to 8.27 million units sold in 2011. That surge was thanks in part to big sales gains not just in its flagship VW brands, but also in its Audi luxury brand. The positive sales trends continue for the German automaker: It recently reported a solid start to 2012 with sales rising 1.3% in January compared to the same month a year earlier.

 

VW's American Depositary Receipts rose 1.5% on Friday's news to $33.98. That just added to their robust 27.3% climb so far this year. VLKAY is now a lot closer to its 52-week high of $39.43 than its 52-week low of $21.88.

 

Part of VW's success last year is due to its global reach. The company has two Chinese joint ventures -- Shanghai Volkswagen and FAW-Volkswagen -- which combined sold 2.26 million vehicles in 2011. That figure was up about 18% over the prior year. And while European sales are expected to contract along with the region's economy, VW still is besting German rivals BMW and Daimler (DAI) for Old World supremacy.

 

Going forward, Volkswagen is banking on increased sales from Audi, as well as revved-up sales from its collaborations with the high-end automaker Porsche. VW and Porsche already have joint deals on many models, but soon the iconic German performance-car maker could be completely owned by VW.

 

Last September, Volkswagen said its board had concluded that legal issues, including lawsuits and an investigation of Porsche's former Chief Executive Wendelin Wiedeking by Stuttgart public prosecutors, would prevent the timeliness of its planned merger with Porsche. If those legal issues prove to be a mere speed bump, we could see VW really hit the gas in 2012.

 

The combination of strong Chinese sales, relatively solid European sales and outstanding growth in both the VW and Audi brands should keep Volkswagen AG -- and its share price -- firing on all cylinders. And if VW mates with Porsche, then get ready for the Beetle-maker -- and its stock -- to really burn rubber in 2012.

 

In the meantime, for those interested in the success of the American auto industry, find out how GM posted its biggest profit ever thanks to the American taxpayer.

 

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

 

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