Source: Google Finance, 12-month price
Closing in on the 10 million mark
During the first quarter of 2013, Volkswagen (NASDAQOTH:VLKAY) sold 2.27 million vehicles, a 5.9% increase from the prior year quarter. Sales in China surged 21.3%, and sales in North America rose 14.9%. Volkswagen’s strong results in these two key markets were attributed to its 2012 acquisition of iconic luxury brand Porsche. In addition to Porsche, Volkswagen’s brands include Audi, Bentley, Bugatti, Lamborghini, SEAT and Skoda. It also sells motorcycles under its Ducati brand. In other words, Volkswagen is the creator of some of the most well-known luxury vehicles in the world.
If Volkswagen can maintain its current momentum, then it is on track to reclaim the number two spot in world automakers after Toyota. In 2012, Toyota sold 9.75 million vehicles, GM sold 9.29 million, and Volkswagen sold 9.07 million.
For the current year, market leader Toyota Motor Corporation (ADR) (NYSE:TM) expects to sell 9.7 million-9.9 million vehicles, but has stated that it is focusing on quality over quantity, in an effort to avoid repeating the damaging recalls of 2009 and 2010, when consumers reported problems with stuck accelerators and defective air bags. Toyota is also taking a slow and steady approach to rebuilding its business, after the devastating tsunami in 2011 crippled its supply chain and temporarily made GM the largest automaker in the world.
Volkswagen expects to sell up to 9.5 million vehicles by the end of the year, and its strong performance during the first quarter signifies that it is on track to hit that goal.
A pricing war in Europe
However, Volkswagen (NASDAQOTH:VLKAY)’s victories in North America and China were offset by losses in Europe, where its fellow automakers have also struggled since the onset of the European sovereign debt crisis. Auto sales across Europe have hit their lowest point since the mid-1990s, and unemployment has hit a record-high average of 12.0%.
In February, Volkswagen’s sales slid 7.2% in its home country Germany and declined 5.9% across all of Europe. While Volkswagen’s losses looked grim, it stayed ahead of the rest of the auto industry, which posted an 11.4% decline during the month. Volkswagen’s sales in Russia were a rare bright spot, posting double-digit growth.
Volkswagen’s big profits from North America and China have given it the ability to prolong a pricing war against General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) in Europe. GM and Ford, Europe’s second largest automaker, have both reduced their prices in response, crushing their own margins in their worst market. So far, these extreme measures have not helped. GM and Ford’s European sales in February declined 20.6% and 21.0%, respectively. Meanwhile, Toyota Motor Corporation (ADR) (NYSE:TM) posted a more manageable 8.0% year-on-year decline.
While Ford has expressed concerns regarding its European prospects, rival GM has decided to continue investing heavily in the market. GM recently announced that it would invest another $5.2 million in its loss-making German brand Opel over the next three years, to support launches of new models. GM hired Karl-Thomas Neumann, the former head of Volkswagen’s China business, to oversee these turnaround efforts.
Will China save GM and Ford?
Although Volkswagen (NASDAQOTH:VLKAY) performed well throughout the first quarter and in February, its March sales were less impressive. Volkswagen delivered 864,000 vehicles, a 0.2% gain from the previous year, due to worsening economic headwinds in Europe. Meanwhile, GM posted 6.4% global sales growth in March and Ford Motor Company (NYSE:F) bounced back with 6.9% growth.
GM and Ford’s recovery was fueled by robust growth in China. GM China’s sales rose 12.6%, while Ford China posted a whopping 65% gain. Volkswagen’s sales in China rose 12.4%.
GM’s operations in China are the largest of its peers, where it sells more vehicles than back at home. In March, GM sold 816,373 vehicles in the country, with a higher percentage of higher-end Buicks and Cadillacs being sold than lower-end Chevrolets, which posted negative growth. Meanwhile, Ford sold 186,000 vehicles in China, primarily driven by strong demand for its flagship Focus. Ford also owns a 30% stake in Chinese automaker Jiangling Motors, and has a 50-50 joint venture agreement with another automaker, Chongqing Changan. These two partnerships have helped Ford rapidly expand its footprint against General Motors Company (NYSE:GM)’ larger operations.
Volkswagen, which operates under a similar system of partnerships and joint ventures, reported that it sold 598,100 vehicles in China during the first three months of 2013, but did not provide month-by-month figures. Volkswagen notably includes Hong Kong and Macau in its China segment, unlike GM and Ford Motor Company (NYSE:F), which report these regions separately.
It’s apparent that an increasingly affluent Chinese middle class is going to Volkswagen and GM for higher-end vehicles, while sticking with Ford for mid-range ones, such as the Focus. All three automakers have benefited from the decline in demand for Japanese vehicles, which was partially caused by the ongoing Senkaku Islands dispute between the two nations.
In the near term, however, I believe that renewed fears of a Chinese slowdown, due to its recent GDP miss (7.7% vs 8.0% expected) will weigh on China-dependent stocks, such as these three automakers.
The Foolish Bottom Line
In closing, let’s break down the fundamentals of Toyota, General Motors Company (NYSE:GM), Volkswagen and Ford, to see which company is a better investment at current prices.
| Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Qty. Revenue Growth (y-o-y) | Qty. EPS Growth (y-o-y) | |
| Toyota Motors | 14.54 | 0.64 | 7.94% | 110.41 | 3.51% | 9.30% | 23.40% |
| General Motors | 6.65 | 0.27 | 16.15% | 43.38 | 4.06% | 3.50% | 64.70% |
| Volkswagen | N/A | 0.34 | 30.15% | 114.57 | 11.27% | 12.50% | -21.30% |
| Ford Motors | 7.75 | 0.40 | 36.10% | 644.09 | 4.22% | 5.30% | -88.30% |
| Advantage | GM | GM | Ford | GM | Volkswagen | Volkswagen | GM |
Source: Yahoo Finance, April 16
As we can see, being bailed out by the government has its advantages. As a result of its 2009 bankruptcy and bailout, GM has the lowest debt of all its competitors. It also has the strongest earnings growth and cheapest valuation of its peers.
Meanwhile, Toyota’s robust top and bottom line growth make it a strong second choice. A weaker yen will also boost its overseas profitability. However, Toyota’s challenges in the anti-Japanese market should be noted, and could weigh on sales growth throughout the year.
Ford Motor Company (NYSE:F) is still faring the worst, being weighed down by enormous debt (it was the only major U.S. automaker not bailed out) and poor bottom line growth due to its major exposure to Europe. Volkswagen (NASDAQOTH:VLKAY), as the largest automaker in Europe, is also suffering from the same problems. However, I believe that the appeal of Volkswagen’s luxury vehicles in China and North America will help soften the blow a bit – an advantage that Ford’s stodgy luxury brand, Lincoln, does not have.
For now, I believe that GM and Toyota Motor Corporation (ADR) (NYSE:TM) are safer investments, but Volkswagen is the one to keep an eye on. Strong growth in China, an enviable portfolio of high-end brands, and healthy demand in North America all point to higher growth once the European crisis comes to an end.
Leo Sun owns shares of General Motors. The Motley Fool recommends Ford Motor Company (NYSE:F) and General Motors. The Motley Fool owns shares of Ford.
