Volkswagen [VOW] has floated an 11.5% stake its truckmaking arm Traton [8TRA], as the world’s largest carmaker seeks to unlock hidden value from a portfolio spanning a dozen brands and subsidiaries.Traton’s IPO has thus far had a pull effect on VW's share price, which opened 3.6% higher on Thursday, relative to last week's close.
Traton, which comprises the Scania and MAN automotive brands (along with MAN’s Brazilian subsidiary), went public on the Frankfurt and Stockholm stock exchanges last Friday at a price of €27 a share – the lower end of its range. Shares closed down 2.8% on their first trading day, but have since pulled back to above €27, valuing the whole of Traton at around €13.5bn, around 10 times the past 12 months’ earnings.
VW’s share price pulls up
VW's share price, which trades at under seven times TTM earnings, has been saddled by the so-called conglomerate discount, whereby the market values sprawling industrial entities below the sum of their holdings. VW’s paltry valuation compares to a PE ratio of around 15 for the wider “auto & trucks manufacturers” industry, according to Refinitiv.
At a group level, operating margins averaged 5.7% for the past 12 months – a slim figure even for the car industry, where earning margins are razor-thin. By comparison, operating margins at BMW [BMW] are 7.6%, and Mercedes-Benz parent Daimler [DAI] at 6%.
|PE ratio (TTM)||6.83|
|Return on equity (TTM)||10.44%|
VW share price vitals, Yahoo finance, 04 July 2019
Clarity and focus at Volkswagen
Operating profits at Traton look better, clocking in at 7.6% for the first quarter of this year, and the sell-off has provided clarity on the true value of this part of Volkswagen’s business, without being obscured by its parent company’s sprawling mass. The trucking unit’s valuation is in line with NYSE-traded peer Navistar [NAV], which Traton itself owns a stake in.
The Traton float also hints at VW’s eagerness to refocus its strategy and finances as it prepares to spend billions developing battery-electric vehicles – its main revenue driver. At the same time, the company has partnered with Ford to share production costs on light commercial vehicles, which some analysts see as a prelude to closer collaboration in other areas.
What next for the industry?
Few peers have as vast a portfolio as VW’s, but there are suggestions BMW and Daimler may be pursuing similar restructuring plans of their own. Daimler is reorganising along three verticals – trucks, mobility services and passenger cars – although it has dismissed these would lead to independent flotations. And in a move that attests to the urgency of optimising returns in the industry, the Mercedes-Benz parent partnered with archrival BMW, seeking to save as much as €7bn from shared R&D.
Daimler and BMW's targeted save from shared R&D
From a pure share price standpoint, VW has so far proven the winner among German carmakers. As of Tuesday’s close, its stock is up almost 13% year-to-date at €153, compared to an increase of 6% for Daimler and a BMW’s fall of 4.5% over the same period. Analysts’ consensus target price for VW is €193, with most brokers advising a 'buy' rating.