Volkswagen Group: More than VWs

05/21/2015 10:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

Early indications are that Mario Draghi's quantitative easing program is working, suggests Tyler Laundon, editor of Top Stock Insights.

Reports out of the EuroZone suggest that credit is easier to get, loan volumes are rising, lending rates are falling, and financial flows into the area are on the rise. These all portend good things for modest GDP growth in 2015.

And that means many European equities that already look undervalued based on conservative forward earnings estimates could be well-positioned for a sustained rally.

One way to play this trend to play is with one company you already know—Volkswagen Group (VLKAY)—the world's second-largest auto manufacturer.

The VW brand itself, while well-recognized, only has around 3% market share in the US. This is a major opportunity for the company.

It is making some progress and the addition of connected-car features may help improve US customers' perception of the brand.

One interesting feature is the recently announced Apple Watch app that will allow VW Car-Net-enabled vehicles to monitor fuel levels and car location. The app will also be able to control locks and it will allow parents to remotely monitor the speed of the vehicle, extremely handy for parents of teenage drivers.

Meanwhile, there's a lot more to the VW Group than just the VW brand. It also owns premium and ultra-luxury auto brands Audi, Porsche, Bentley, and Lamborghini, as well as the motorcycle company Ducati.

Indeed, the importance of the Audi and Porsche brands to the VW Group can't be overstated. The two premium brands only generate 30% of volume, but they produce 70% of earnings before interest and tax.

I see 20% upside in shares of VW Group right now, with significant additional upside potential if the company is able to execute its cost-savings plan and capitalize on new product introductions with the Audi and Porsche brands this year.

There remains even more upside should the core VW brand gain momentum in the US market; new product introductions later in 2015 should help us see if the VW brand is on track.

The stock is currently trading at a significant discount to peers, with a current-year P/E of under 10. I see this as a relatively low-risk way to play a recovering European economy with a company that has a global customer base.

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