Volkswagen is Looking Forward to a Profitable Year

Despite the controversies plaguing Europe’s largest automaker, luck is still in their favor. Last February 20, Volkswagen announced that its pretax profit beat the analysts’ forecasts in 2006 and further stated that it is looking forward to a continued positive earnings trend for this year. The increase in profit obtained by the automaker is due to the various cost cutting measures that the company employed coupled by the release of some of their popular new models. Volkswagen shares increase by 8% on the German stock exchange trading.

The automaker that is also the maker of the popular Volkswagen Rabbit parts and owner of renowned brands like Skoda, Bentley, Audi and Bugatti said that its pretax profit increase by 10.5% to 1.8 billion or $2.4 billion comparing that with the analysts; forecast amounting only to 1.5 billion or $1.9 billion. The high earnings of the automaker helped strengthen the share gains.

The automaker also reported that its net profit also doubled reaching to 2.72 billion or $3.6 billion from 1.12 billion or $1.5 billion a year earlier. The automaker added that the increase in profit they are enjoying is also due in part to a one-off gain resulting from the German tax reform.

Similarly, Volkswagen’s revenue increased due to the success of Audi and Skoda with the introduction of their new models. The two brands have contributed an 11% increased or 104.9 billion ($137.8 billion) in the revenue of Volkswagen. Quality new models plus a strict cost-cutting program has created for Volkswagen a good foundation for achieving its medium-term restructuring targets. Under the automaker’s “For Motion Plus” initiative it has been able to cut cost and streamlined the workforce by laying-off some 20,000 workers. It has also signed an agreement with the German unions to introduce longer hours at its factories in order to become more competitive.

Volkswagen said in a statement, “We will continue to vigorously drive forward the activities to improve cost structures and processes in 2007. This, along with the steps we undertook in 2006, will lead to a sustainable improvement in our competitiveness.”

The shares of Volkswagen have also increased by 7 to 7.96% closing at 94.94 or $124.72 in Frankfurt trading. According to Nathan Kohlhoff who is an automotive analyst with UniCredit Group in Munich, the automotive division’s liquidity at 7.1 billion or $9.33 billion is “quite strong” and higher by almost 2 billion or $2.62 billion forecasted by UniCredit. Such result would add an additional 5 or $6.57 to the current share price target of UniCredit of 85 or $111.70 and create the foundation for share gains.

After a year of close room infighting that have resulted to the slowing down in management efforts to restructure, Chairman Ferdinand Piech has finally succeeded in ousting Bernd Pischetsrieder as chief executive of Volkswagen Group last November and replaced him with former Audi boss Martin Winterkorn. Upon assuming the position of Chief Executive, Winterkorn has made it his primary priority to revive the flagship Volkswagen brand and has also taken the responsibility of managing it.

This moved by Winterkorn has led to various speculations like some of the models of Volkswagen such as the new Golf which was originally scheduled for production early next year could be postponed by another six months or so. Likewise the appointment of a new group design chief in the person of Walter de’ Silva is also seen by many as an indicator that other projects are going back to the drawing board. But Volkswagen said that 2007 sales will rise as introduces new models.

UniCredit’s Kohlhoff said that “It may take some time for management to make its mark. Winterkorn has already said he wants to make VW among the most competitive carmakers. So they are clearly setting ambitious goals.”

On the other hand, the shareholders of Volkswagen were not affected by the fall in Volkswagen’s operating profits which decline by 2 billion or $2.63 billion in 2006 and by the company’s reorganization which cost the automaker some additional 2.4 billion or $3 billion. Comparing that to the operating profit obtained by the company in 2005 that reached 2.89 billion or $3.79 billion. Excluding all other special items the operating profit of Volkswagen grew by almost 52% or 4.38 billion ($5.75 billion). Europe’s largest automaker is scheduled to release its full earnings details on March 9.