{"id":30422,"date":"2012-06-22T11:23:38","date_gmt":"2012-06-22T15:23:38","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/volkswagen-vlkay-a-no-brainer-contrarian-investment\/"},"modified":"2012-06-22T11:23:38","modified_gmt":"2012-06-22T15:23:38","slug":"volkswagen-vlkay-a-no-brainer-contrarian-investment","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/22\/volkswagen-vlkay-a-no-brainer-contrarian-investment\/","title":{"rendered":"Volkswagen (VLKAY) \u2013 A No-Brainer Contrarian Investment"},"content":{"rendered":"

Article by Investment U<\/a> <\/p>\n

Investors can\u2019t turn on the television, jump online, or open a newspaper today without being pounded with headlines about the Eurozone Crisis. Greece\u2019s unmanageable debt, Spain\u2019s unbelievably high unemployment, Ireland\u2019s banking woes \u2013 the list goes on.<\/p>\n

The crisis created extremely volatile market conditions the individual investor is having a hard time stomaching. The media paints a gloomy future, and it\u2019s no surprise that billions of dollars have moved out of equities. Investors are losing their confidence.<\/p>\n

But contrarian investors like myself will tell you this is the perfect time to going shopping for discounts in the market, especially strong businesses located inside the Eurozone. And I\u2019ve found one German automaker that fits the bill.<\/p>\n

\u201cDas Auto\u201d<\/h2>\n

Headquartered in Wolfsburg, Germany, and founded in 1937, Volkswagen<\/strong> (OTC: VLKAY.PK) provides automobiles to drivers around the world.<\/p>\n

You\u2019re probably familiar with Volkswagen\u2019s popular models such as the Jetta, Beetle and Passat. But the company also provides vehicles under Bentley, Audi, Bugatti and Lamborghini, to name a few.<\/p>\n

So why is Volkswagen showing up on the value stock radar?<\/p>\n

In large part, because investors don\u2019t want to touch European companies with a 20-foot poll. Even the financially fit businesses operating in Europe\u2019s strongest economy, Germany.<\/p>\n

Trading At a Discount<\/h2>\n

In general, a company with a low price-to-book ratio signals a stock is undervalued. Of course, things are never that simple. If they were, all investors would need to do is buy any stock trading below its book value and call it a day.<\/p>\n

Currently, Volkswagen\u2019s price-to-book is 0.90, meaning the company is trading at a 10% discount.<\/p>\n

Volkswagen shares currently trade around $30. The current book value per share is $32.28.<\/p>\n

This means if the company was liquidated today, each shareholder would, in theory, get $32.28 per share for their ownership of the company\u2019s hard assets. (And this doesn\u2019t include the separate value of patents, etc. that could further boost book value.)<\/p>\n

Who wouldn\u2019t want to buy a stock today, have the company (worst-case scenario) fail tomorrow and still make over a $2 per share profit the next day? Like I said before, it\u2019s not that simple.<\/p>\n

Many stocks that start trading below book value hint that there might be something fundamentally wrong with the company. So let\u2019s break down some of Volkswagen\u2019s financials to ensure this isn\u2019t the case.<\/p>\n

Fundamental Breakdown<\/h2>\n

Investors should check the return on equity (ROE) and return on assets (ROA) for any stock trading at a discount.<\/p>\n

ROE measures how well a company is using reinvested earnings to produce additional earnings for shareholders. Currently Volkswagen\u2019s ROE is a healthy 30.84%, which is well above the industry average that sits at 21.81%.<\/p>\n

ROA indicates how efficient management is at using the company\u2019s assets to generate earnings. And many stocks begin to trade at a discount because investors believe the company\u2019s assets are overstated. Looking at ROA can help you determine if a company is properly converting money it has invested into profits.<\/p>\n

Volkswagen ROA is 7.10% – more than double the industry average of 3.17%.<\/p>\n

Comparison is always key when analyzing a company\u2019s metrics, so let\u2019s see how Volkswagen stacks up against an American competitor like Ford Motor<\/strong> (NYSE: F).<\/p>\n

\"Volkswagen<\/p>\n

As you can see in the chart above, Volkswagen dominated every category. Value investors should be salivating right now. Ford\u2019s price to book is currently 2.39, close to three times higher than Volkswagen.<\/p>\n

Now let\u2019s look at some more industry averages the company is torching.<\/p>\n

Volkswagen\u2019s current P\/E is an attractive 3.23; the industry average is over six times higher<\/span> at 22.37.<\/p>\n

The company\u2019s recent quarterly operating margins are well above the industry average of 4.52%, sitting at 6.78%. And their 6.69% quarterly profit margins more than doubled the industry average of 2.81%.<\/p>\n

And their revenue growth over the past few quarters has been excellent.<\/p>\n

\"A<\/p>\n

The company\u2019s most recent quarter saw sales grow 26.30% compared to the same period last year. In comparison, the industry average was 18.81%. And Ford had negative sales growth of -2.02% in their most recent quarter.<\/p>\n

The only metric you could be nervous about is Volkswagen\u2019s 152.3% debt to equity. But don\u2019t worry too much\u2026<\/p>\n

Auto manufacturing is capital-intensive industry and always carries a high debt-to-equity ratio.<\/p>\n

Currently the industry average is 153.31%, so Volkswagen is right on par here. I would be more worried about Ford\u2019s 603.54% debt to equity that\u2019s almost four times higher.<\/p>\n

Volkswagen\u2019s dividend yield of 2.70% is just icing on the cake; the industry average is only 1.73%.<\/p>\n

Going Against the Crowd<\/h2>\n

When investors are fleeing a particular sector or economy out of fear, contrarian investors stand by ready to put their money to work.<\/p>\n

The fact that Volkswagen has exposure to markets outside the Eurozone, including North America, South America and the Asia-Pacific, gives the company an advantage over other European businesses that are less fortunate in global reach.<\/p>\n

Over 54% of Volkswagen\u2019s cars are sold outside the Eurozone. And Germany makes up 44% of vehicles sold inside Europe.<\/p>\n

Better to have almost half your European sales inside the country with the strongest economy in the region. Not to mention, Germany is the one most likely to be left standing should the Eurozone completely fall apart.<\/p>\n

Investors should consider Volkswagen as a true value play right now. Fundamentals are strong and the stock is trading at a nice discount. Though, if you\u2019re still wary about the Eurozone crisis, you might consider waiting a bit for Greece to possibly exit. A Greek exit could send prices down even further, giving an even better discount on shares.<\/p>\n

Good Investing,<\/p>\n

Ryan Fitzwater<\/p>\n

\n<\/a> <\/a> <\/a> <\/a> <\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Investment U Investors can\u2019t turn on the television, jump online, or open a newspaper today without being pounded with headlines about the Eurozone Crisis. Greece\u2019s unmanageable debt, Spain\u2019s unbelievably high unemployment, Ireland\u2019s banking woes \u2013 the list goes on. The crisis created extremely volatile market conditions the individual investor is having a hard … <\/p>\n

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