VW profit leap boosts analysts’ expectations

Record sales of luxury Audis and Porsches boosted Volkswagen’s first-quarter operating profit by 22 per cent and left analysts expecting an upward revision of the German carmaker’s 2014 earnings guidance.

The German group stuck to its previous guidance in today's quarterly results, saying that its operating margin could be between 5.5 and 6.5 per cent after 5.9 per cent last year. In February it also said that economic conditions need to improve, especially in Europe, for it to achieve record full-year profit.

But analysts said the carmaker was understating its prospects. Its first-quarter operating profit of €2.86 billion beat the average estimate in a poll of analysts by more than 4 per cent.

"There's an 80 per cent chance VW will raise its guidance in the next three to four months," Frankfurt-based Metzler Bank analyst Juergen Pieper said, citing the recovering European economy and growing production savings from efforts to boost commonality of parts across VW's many brands and models.

European car sales, which make up 40 per cent of VW’s group sales, made their seventh straight monthly gain in March after a six-year slump that cut registrations to a 20-year low.

VW is running extra production shifts at its main Wolfsburg plant during the second quarter to meet excess demand for its Golf and Tiguan models.

"We're now more confident on the situation in Europe (than at the start of the year)," sales chief Christian Klingler said in a conference call.

First-quarter deliveries of Audi and Porsche models, which account for about two thirds of VW group earnings before interest and tax (EBIT), were up 11.7 per cent and 4.5 per cent respectively to 413,000 and 38,700 cars.

VW shares closed 1.2 per cent lower at €191.90 as the market bemoaned the lack of a more upbeat outlook and a sharp decline in automotive cash flow, a closely watched metric for the quality of earnings, analysts said.

The company has used resilient profits to boost investment during the European recession that plunged French and Italian peers into the red, but falling sales in North America, as well as Brazil, Russia and other emerging markets with volatile currencies, took the edge off the group's quarterly performance.

Generating cash to fund global expansion is getting harder as VW balances rising short-term costs, such as €2 billion in negative currency effects during the first quarter, with upgrades and additions to a fleet of more than 310 models.

“It’s more important than ever that we focus on three key areas - disciplined cost and investment management, profitability targets and improved profitability in all regions,” finance chief Hans-Dieter Poetsch said.

The need for cost cuts is nowhere more apparent than at VW’s core passenger car brand, which accounted for almost two thirds of the group’s 2.4 million first-quarter deliveries, analysts said.

Stagnant volume, high fixed costs and technology outlays shrank the VW brand’s margin to a dismal 1.8 per cent, compared with a 6 per cent long-term target.

By comparison, VW’s results in the first quarter of 2013 had been hit by about €350 million of provisions at the engineering division MAN SE for a failed power plant project and the cost of an overseas vehicle recall.

VW expects to increase 2014 group deliveries slightly from last year’s record 9.7 million vehicles and says sales will come in within a range of 3 per cent around last year’s €197 billion.

- Reuters