This analysis was originally published as a stock note by Morningstar Equity Research.
Key Morningstar Metrics for Volkswagen
• Fair Value Estimate: EUR 172.00
• Morningstar Rating: ★★★★★
• Economic Moat: None
• Morningstar Uncertainty Rating: Very High
Weighing Up Tariff Scenarios on Automakers
Despite continued uncertainty looming over US import tariffs affecting European automakers, we update our fair value estimate to reflect tariff implications. We also revise our long-term growth assumptions for the European automakers in China.
Why it matters: We have reduced our fair value estimate for Volkswagen VOW3 to EUR 172 per share from EUR 264 and increased our Uncertainty Rating to Very High from High. VW’s share of local production in the US is only 24%, and there is no local production of higher-value Audi and Porsche brands.
• We equally weight four tariff scenarios: the 25% tariff remains in place until the end of 2025, until the end of 2026, from 2026 until the end of Donald Trump’s current term, and indefinitely. The first and final scenarios reduce the fair value estimate by midsingle digits and close to 30%, respectively.
• We find high loyalty rates for domestic car brands among major car manufacturing nations, most notably in Asian countries where 68% of China’s vehicle sales are domestic brands. We think this can increase to 80%, with the foreign manufacturers seeing larger market share losses in the earlier years of our forecast.
The bottom line: Despite the downward revisions, Volkswagen continues to trade at a deep discount. Given the heightened uncertainty around how it will adjust operations in response to tariffs and second-round effects on operations globally, we believe the discount will remain over the near term.
• We expect a meaningful decline in US vehicle sales in 2025. The potential halting of exports from Europe and Mexico to the US may reduce global capacity utilization or result in excess supply. Both will affect operating margins.
• We include most of the cost savings from the German labor agreement and European capacity reductions from 2028. Porsche expects weaker margin performance and higher capital intensity over the short term. While our capital expenditure forecasts exceeded guidance, we increase and frontload spending further.
Tariffs Will Halt VW Free Cash Flow
The effect of US import tariffs explains one quarter of the reduction in our fair value estimate. The negative impact is reflected in lower gross margins, with the company absorbing some of the cost of sales increase. Lower US sales volumes also reduce fixed cost absorption. Our automotive free cash flow estimate for 2025 before the effects of the tariffs is at the lower end of Volkswagen’s EUR 2 billion-EUR 5 billion guidance. After tariffs, we estimate practically nil automotive free cash flow in 2025.
Two factors lead to the remaining bulk of our fair value estimate reduction. Our adjustment to China’s outlook for foreign automakers results in Volkswagen’s Chinese JV segment selling around 2.2 million vehicles in China by the end of our forecast period, which is 370,000 fewer vehicles versus prior estimates. We have also softened our pricing forecast for VW’s core brand segment. This is offset somewhat by more emphasis on a value-over-volume strategy at Porsche.
Volkswagen maintained its full-year 2025 guidance on the release of its preliminary first-quarter results. However, this guidance excludes the impact of tariff implications, as the effects cannot yet be conclusively assessed. We believe downward revisions or a retraction of guidance are likely. Thus, our 2025 operating margin falls below guidance of between 5.5% and 6.5%.
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