Volkswagen AG

Volkswagen AG (often called the 'VW Group') is a colossal German automaker and one of the world's largest car manufacturers by volume. Headquartered in Wolfsburg, Germany, its empire extends far beyond the iconic Beetle and Golf. The group owns a stunning portfolio of twelve brands from seven European countries, including premium names like Audi, Porsche, Lamborghini, and Bentley, as well as mass-market staples like SEAT and Škoda. This sheer scale provides significant economies of scale in manufacturing and research. However, for investors, Volkswagen is more than just a car company; it's a fascinating and often complex investment case. Its ownership is dominated by the Porsche and Piëch families through their holding company, Porsche Automobil Holding SE, alongside the German state of Lower Saxony. This unique structure, combined with a history of dramatic events and a dual-class share system, makes understanding Volkswagen a masterclass in separating a company's business quality from its market price.

For value investors, VW presents a compelling, if complicated, picture. The company is a cyclical industrial giant that often trades at a low valuation, but understanding its unique quirks is essential before diving in.

One of the first things an investor will notice is that Volkswagen has two main classes of shares listed on the stock exchange:

• Ordinary Shares (VOW): These are common stock that carry voting rights, giving shareholders a say in the company's strategic decisions. They are tightly held by the controlling families and the state of Lower Saxony.
• Preference Shares (VOW3): These are preferred stock that typically have no voting rights. To compensate for this, they usually receive a slightly higher dividend per share and often trade at a significant discount to the ordinary shares.

For most individual investors who aren't trying to influence corporate policy, the preference shares are often the more attractive option. The discount provides an extra margin of safety, and the higher dividend yield offers a better cash return.

Volkswagen's ownership is a tangled web that directly impacts its governance. The key players are:

• Porsche Automobil Holding SE: The investment vehicle for the Porsche and Piëch families, holding a majority of the voting rights.
• The State of Lower Saxony: The German state where VW is headquartered holds a significant voting block.
• Qatar Investment Authority: The sovereign wealth fund of Qatar is another major shareholder.

This concentrated ownership can be a double-edged sword. It provides long-term stability and shields the company from hostile takeovers. However, it can also lead to decisions that benefit the controlling shareholders at the expense of minority investors.

Volkswagen's history is peppered with crises that have created both peril and opportunity for savvy investors.

In 2015, the company was caught in a massive emissions-cheating scandal known as Dieselgate. VW had deliberately programmed its diesel engines with “defeat devices” to meet regulatory standards only during testing. The fallout was immense: billions in fines, vehicle recalls, and a shattered public image. The stock price plummeted by over 50%. For a value investor, this was a classic Benjamin Graham “Mr. Market” moment. A great company, temporarily mired in a terrible (but fixable) crisis, was on sale. The challenge was to assess if the long-term earning power and brand equity of the VW Group would survive the scandal. Those who correctly bet that it would, and bought shares when there was “blood in the streets,” were handsomely rewarded as the company recovered.

In one of the most famous market events ever, Porsche secretly built up a massive stake in Volkswagen in 2008 with the intention of taking it over. When it revealed its position, hedge funds that had been betting against VW stock (by shorting it) were forced to buy back shares at any price to cover their positions. This caused an epic short squeeze that briefly made Volkswagen the most valuable company in the world. While not a value investing strategy, it serves as a wild cautionary tale about the volatility that can surround this stock.

To assess VW as a potential investment, a value investor needs to look beyond the headlines and dig into the fundamentals.

Volkswagen's primary economic moat lies in its immense scale and unparalleled portfolio of brands. From the affordable Škoda to the ultra-luxury Bugatti, the group covers nearly every segment of the automotive market. This diversification provides resilience, while its manufacturing prowess creates a significant cost advantage that is difficult for smaller competitors to replicate.

The entire auto industry is undergoing a seismic shift towards electric vehicles (EVs). VW has committed to investing tens of billions of euros to become a global leader in the EV space. This presents the biggest risk and opportunity for the company.

• The Risk: The massive capital expenditure required weighs on profitability, and the competition from nimble pioneers like Tesla and a wave of Chinese EV makers is fierce.
• The Opportunity: If successful, VW could leverage its manufacturing might and brand recognition to dominate the electric era just as it did the combustion engine era, unlocking tremendous value.

When investigating VW, keep an eye on these key areas:

• Valuation: VW often trades at a low single-digit P/E ratio and below its book value. Compare its Price-to-Book (P/B) ratio to its historical average and to competitors to gauge if it's genuinely cheap.
• Sum-of-the-Parts: A sum-of-the-parts (SOTP) analysis can be very revealing. By valuing individual brands like Audi and Porsche separately, investors have often argued that the parent company's stock price doesn't reflect the true value of its assets. The successful IPO of Porsche in 2022 was a prime example of unlocking this hidden value.
• Capital Allocation: Pay close attention to how management uses its cash flow. Are they reinvesting wisely in the EV transition, paying a sustainable dividend, or buying back undervalued shares? Management's capital allocation decisions are critical to long-term shareholder returns.