VW Jumps on Profit Gain, Sticks to Targets Despite Slowdown

(Bloomberg) --

Volkswagen AG shares advanced the most in three months after first-quarter profit rose and the German carmaker stuck to annual earnings goals despite a global market slowdown and rising legal costs.

The stock jumped 3.7 percent on Thursday after the world’s biggest carmaker said operating profit rose to 4.8 billion euros ($5.4 billion), excluding a 1 billion-euro provision for legal costs. VW boosted sales of lucrative sport utility vehicles, while benefiting from favorable exchange rates and the revaluation of financial instruments that added 400 million euros to the result.

VW Jumps on Profit Gain, Sticks to Targets Despite Slowdown

Volkswagen delivered a “surprisingly strong” set of earnings with good results across the VW, Audi and Skoda brands, Citigroup said in a report. VW improved its model mix and cost saving efforts gained traction, the bank said.

Mixed Start

VW is weathering a slowdown in China better than most of its peers. The company said it gained share in its biggest market, which has contracted for 10 straight months overall amid an economic slowdown and trade tensions with the U.S. Volkswagen will still meet its annual target for vehicle sales and revenue, even after deliveries at Porsche and Audi, its two top profit contributors, declined during the first quarter.

VW Jumps on Profit Gain, Sticks to Targets Despite Slowdown

The passenger car business was “very stable,” Chief Financial Officer Frank Witter told reporters Thursday. He added that the carmaker needed to speed the transformation of its business amid growing global economic risks.

That process took a step back in March, when Volkswagen shelved a partial share sale of the Traton SE heavy-trucks unit, the centerpiece of a revamp to become less centralized and boost efficiency. The move, blamed on market conditions, disappointed investors and came shortly before Swiss train maker Stadler Rail AG completed a successful listing.

A public offering of Traton remains “a desired outcome,” Witter said. Unlocking value still is “a priority” for VW as the company is “tremendously undervalued,” he said, declining to identify concrete measures how the company is going to lift its valuation.

VW told investors in March it plans to provide a strategy update this summer.

The company is also seeking to expand its sprawling Chinese operations to boost production and research in the country that’s leading a global shift toward electric vehicles. It plans to expand activities with all three joint venture partners as about half of the 22 million battery-electric vehicles it plans to produce by 2028 are bound to be sold in its largest market

VW has ventures with SAIC Motor Corp. and FAW Car Co., two of China’s largest manufacturers, after being one of the first foreign automakers to arrive in China more than three decades ago. VW is also exploring options to acquire a stake in its smaller third partner Anhui Jianghuai Automobile Group Corp.

Witter said he was “a bit more” optimistic about a demand recovery in China during the second half of the year.

VW expects to lift annual deliveries slightly and improve revenue by as much as 5 percent, despite slowing economic growth, intensifying competition and more possible production bottlenecks to adopt new emissions test procedures in Europe. The group’s operating return on sales before special items is forecast between 6.5 percent and to 7.5 percent.

Shares Gain

VW rose to 160.74 euros late Thursday in Frankfurt trading, taking gains this year to 16 percent. Porsche Automobil Holding SE, the Porsche-Piech family-controlled investment company that’s VW’s main shareholder, gained 4.2 percent.

Revenue at the main VW car brand, accounting for about half of global deliveries, rose 7.1 percent, while operating profit came in at 921 million euros. This excludes special items of 400 million euros relating to fallout from the diesel-emissions cheating scandal. Overall, costs related the 2015 revelations VW had rigged as many as 11 million diesel vehicles worldwide to dupe emissions tests have reached 30 billion euros.

Witter anticipates a related cash outflow of about 2.4 billion euros this year. VW has earmarked 5.5 billion euros in contingent liabilities, of which 3.4 billion euros are related to investor lawsuits, he told analysts today.

Talks with Ford Motor Co. to cooperate on vans, which may extend into joint projects on electric and self-driving vehicles, are progressing well with the “finishing line in sight,” Witter said on a call with reporters.

©2019 Bloomberg L.P.