This article first appeared on Morningstar Australia, and was written by Anabelle Dickson
As automakers ramp up transition efforts to battery electric vehicles (EVs), Volkswagen (VW) is set to come up against the largest manufacturer in the market—Tesla.
But Morningstar senior equity analyst, automotive Richard Hilbert believes if Volkswagen achieves its EV sales objectives, the company could outsell Tesla in 2025 and lead the pack of automakers making the transition.
“By 2030, VW leads the group with an estimated six million EV units and commands the group’s highest share at 18%. The automaker is one of the world’s largest manufacturers by volume,” he says in a new Morningstar report surveying the EV transition efforts at Daimler, BMW and Nissan, among others.
“Tesla is a close second to Volkswagen with an estimated 5.4 million units and 16% of the group’s total EV volume.”
As such, Morningstar forecasts 49% per annum of annualised growth in Volkswagen’s (VOW) global EV sales volume from 2019 to 2030 through its brands Audi, Porsche, Bentley, Volkswagen, Lamborghini and Bugatti.
This is a steep increase on the latest figures which shows Volkswagen has roughly 232,000 EVs in circulation. Tesla (TSLA) has 500,000 but not all automakers have made the same level of progress.
Internal combustion engines are on the way out as emission standards ramp up throughout Europe and China. EVs are estimated to reach 30% of global market demand in 2030, according to Morningstar estimates.
The transition to a pure-play EV offering has been slow for some automakers as they come to grips with high development spending and winding down the manufacturing of internal combustion engine vehicles.
In the last year, Renault (RNO), for instance, doubled its EV units to 122,000 and is targeting EVs at 90% of total European Renault brand passenger vehicles sales volume by 2030.
On the other hand, Ferrari (RACE) is more focused on hybrid vehicles, and has announced it will launch an all-electric car in 2025. No-moat VW has set targets for its EVs to reach 20% of global sales volume by 2025 and 50% by 2030, with 50 models available to consumers. These include the Audi Q4 e-tron, Porsche Taycan and Volkswagen ID.4.
Volkswagen Preferred share class is trading at a 52% discount to Morningstar’s EUR 340 fair value estimate. The Ordinary share class is trading at a 25% discount to the same estimate.
The difference between the two share classes is the lack of voting rights and EUR 0.06 preference in earnings per share and dividends per share each year for the Preferred.
No investment opportunity in EV rollout
Among the automotive group, Hilbert says the transition to EVs does not represent an investment opportunity on its own. However, he thinks some mass-market automakers are attractively valued as market concerns over the microchip shortage, EVs lower contribution margin and increasing competition from EV start-ups discount valuations.
“In our view, automakers are merely replacing internal combustion engine (ICE) vehicle volume with BEV volume, resulting in limited incremental profits from battery electric vehicles alone,” he says.
“However, we think mass-market automakers may enjoy a temporary period of higher-margin, possibly around the middle of the decade, once EV production reaches critical volume, because of less complicated manufacturing on dramatically fewer powertrain parts.”
Nissan (7201) had 70,000 in circulation with EVs set to make up 41% of sales volume by 2030.
The Japanese automaker has planned for more than one million electrified sales in 2023. By 2030, it would have all its new vehicle offerings electrified in Japan, China, the US and Europe.
Nissan was one of the first movers in the mass-market EV space with the launch of the Leaf in 2010 and the e-NV200 commercial van in 2014. However, launches have slowed since. The company has plans to release eight EV models in 2023.
“The firm remains in turnaround mode after years of neglecting new model development as well as pursuing volume and market share,” Hilbert says.
Nissan shares are trading at a steep 60% discount to Morningstar’s fair value estimate of JPY 1,500 at five stars.
Narrow-moat BMW (BMW), meanwhile, which makes BMW, Mini, and Rolls-Royce, is Morningstar’s top pick. The EUR 135 fair value estimate represents 57% upside potential versus the current market price.
BMW has 13 EV models planned to launch for 90% of its market segments by the end of 2023, increasing to 100% by 2030.
“In our view, the 4-star shares have been overly discounted by the market and are attractively valued,” Hilbert says.
Morningstar’s narrow moat rating is based on an intangible asset moat source, including brand and intellectual property.
Since 2002, BMW's average returns exceeded its cost of capital by 7.6% which Morningstar believes is an outstanding performance for an automaker.
Tesla, which was not included in the report as it is not transitioning to EVs, remains overvalued by Morningstar, trading around 45% above the fair value estimate of USD $680.
