Volkswagen stock faces challenges in key segments, cost cuts likely ahead

On Tuesday, Volkswagen AG (VOW:GR) (OTC: OTC:) saw its price target reduced from EUR108.00 to EUR101.00 by an HSBC analyst, who also maintained a Hold rating on the stock.

The adjustment comes as the automotive company faces challenges that necessitate discussions about cost reductions and potential plant closures.

The analyst noted that the recent guidance from Volkswagen (ETR:) for the year 2024 indicates caution, with certain details omitted from the announcement. Notably, there was no mention of China as a contributing factor to the lowered expectations, nor were Porsche or Audi specifically cited.

This omission suggests that the issues affecting these areas may already be familiar to the market, including market share losses and aggressive pricing in China, as well as supply chain disruptions affecting Porsche and production shortages for Audi’s V6 and V8 engines.

The focus of concern highlighted by the analyst was on the weaker performance anticipated in Volkswagen’s Passenger Cars (PC) and Commercial Vehicles (CV) divisions, as well as in its Tech Components unit. These are the sectors where the company is actively engaged in discussions about cost-saving measures.

The analyst expressed suspicion that the need for savings in these particular areas of Volkswagen’s operations might not be coincidental. The implication is that the financial pressures in these divisions are significant enough to potentially lead to plant shutdowns as part of the cost-cutting strategy being considered by the company.

Volkswagen has not publicly linked the potential cost-cutting measures to any specific financial targets or outcomes. The company’s discussions around these measures are ongoing, and further details regarding the impact on operations and financial guidance are yet to be disclosed.

In other recent news, Volkswagen has faced substantial changes and modifications. The company’s first half of 2024 earnings report revealed sales revenues of €159 billion and a return on sales of 6.3%, with 4.35 million vehicles delivered to customers.

Bernstein SocGen Group maintained its Market Perform rating on Volkswagen stock, following a revision in the automaker’s financial guidance for fiscal year 2024. The firm, however, reduced its price target for Volkswagen shares to EUR111.00 from the previous EUR136.00.

Volkswagen’s management foresees the need for significant cuts, despite internal opposition, after forecasting flat revenues and a 6.1% profit margin for FY24.

The automaker plans to launch 30 new products in the latter half of 2024, half of which are battery electric vehicles, to bolster sales and offset inventory build-up.

Despite high battery costs, Volkswagen is steadfast in its strategic plan, focusing on electrification, productivity, and efficiency.

InvestingPro Insights

In light of the recent analyst downgrade and Volkswagen’s cautious outlook, InvestingPro data provides additional context for investors. Despite the challenges highlighted in the article, Volkswagen (OTC: VWAGY) currently trades at a remarkably low P/E ratio of 3.34, suggesting the stock may be undervalued relative to its earnings. This is further supported by an InvestingPro Tip indicating that the company is “Trading at a low earnings multiple.”

Moreover, Volkswagen’s dividend yield stands at an attractive 5.85%, with the company maintaining dividend payments for 33 consecutive years. This demonstrates a commitment to shareholder returns even in challenging times. The stock is also trading near its 52-week low, which could present an opportunity for value investors.

However, it’s important to note that Volkswagen suffers from weak gross profit margins, as pointed out by another InvestingPro Tip. This aligns with the article’s discussion on cost-cutting measures and potential plant closures.

For a more comprehensive analysis, InvestingPro offers 11 additional tips for Volkswagen, providing deeper insights into the company’s financial health and market position.

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