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VW Bounces Back but Warns About Infections in Europe and U.S.

10/29/2020 | 10:02am EDT

By William Boston

BERLIN -- Volkswagen AG, the world's biggest car maker by sales, on Thursday became the latest big car maker to report a higher-than-expected profit while warning that rising coronavirus cases and fresh lockdowns were threatening the rebound.

Global auto makers have made considerable headway since the summer, but that progress is now being endangered by the trajectory of the pandemic. In Europe, new Covid-19 infections are at record levels and still rising, causing governments to impose new lockdowns.

Even as car makers are regaining ground after auto markets collapsed in the spring, global sales are still expected to be down as much as 20% for the full year. With the resurgence of the pandemic and renewed restrictions on many businesses it is unclear if the recovery in the third quarter will continue in the coming months and into the first quarter of next year.

"Honestly, this depends on whether the [lockdown] measures that have been announced really take hold in all core markets in November. If that is not the case, then we would see a clear impact on the first quarter," said Christian Dahlheim, Volkswagen's sales chief.

Volkswagen said net income in the third quarter was 2.6 billion euros, equivalent to $3 billion, down 32% from a year ago but after a loss of EUR1.6 billion in the hard-hit second quarter. Volkswagen sold 2.6 million vehicles world-wide in the third quarter, a 38% increase from the second quarter and nearly on par with sales the previous year.

The German auto maker is benefiting a lot from China's recovery. The first country to succumb to the pandemic, China locked down hard and quickly pulled out of the slump. It is the only major auto market that is expected to post growth in new-car sales this year. The recovery in the U.S. and Europe has lagged behind.

From January to September, Volkswagen's net income plunged 87% to EUR1.4 billion and revenue fell 17% to EUR155.5 billion.

"The coronavirus remains a central problem," said Frank Witter, Volkswagen's finance chief. "This situation now is anything but relaxed."

Global auto makers have been reporting strong profits in the third quarter. Fiat Chrysler Automobiles NV on Wednesday reported a record operating profit of $2.7 billion for the quarter, beating analysts' expectations and marking a stark improvement from the second quarter, when the company posted a net loss of $1.2 billion.

Ford Motor Co. also delivered a strong three months, reporting net income of about $2.4 billion and a global pretax profit margin of 9.7% -- its highest in five years. Analysts expect General Motors Corp.'s bottom line to bounce back to pre-pandemic levels when it reports earnings Nov. 5.

Daimler AG, the maker of Mercedes-Benz luxury cars, last week raised its profit outlook for the full year to be in line with last year, as stronger markets and cost cuts boosted earnings.

But the strong quarterly earnings pale against the long-term effects the pandemic could have on the industry's profitability. The economic fallout is expected to cost the top 20 auto makers world-wide around $100 billion in lost profits this year, according to consultants McKinsey & Co.

"It might take years to recover from this plunge in profitability," McKinsey said in the report.

The course that the pandemic takes is the great unknown as the auto industry contemplates its future. The bump in the third quarter may turn out to be the beginning of a sustained recovery. But it could also become a fragile green shoot that is stamped out by another downturn in the economy in the wake of new lockdown measures.

"We are assuming that the recovery will continue in the fourth quarter, but no one here thinks this is going to be easy," said Mr. Witter. "And this assumes that there won't be any large-scale lockdowns in bigger markets."

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

10-29-20 1101ET

Stocks mentioned in the article
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DAIMLER AG 2.00% 79.73 Delayed Quote.37.97%
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VOLKSWAGEN AG 1.41% 233.3 Delayed Quote.53.06%
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Sales 2021 250 B 303 B 303 B
Net income 2021 13 669 M 16 551 M 16 551 M
Net cash 2021 30 886 M 37 396 M 37 396 M
P/E ratio 2021 8,50x
Yield 2021 3,04%
Capitalization 136 B 165 B 165 B
EV / Sales 2021 0,42x
EV / Sales 2022 0,37x
Nbr of Employees 662 653
Free-Float 56,8%
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Average target price 275,95 €
Last Close Price 233,30 €
Spread / Highest target 32,9%
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Herbert Diess Chairman-Management Board
Arno Antlitz Chief Financial Officer
Hans Dieter Pötsch Chairman-Supervisory Board
Frank Witter Head-Finance & Information Technology
Kurt Michels Chief Compliance Officer
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VOLKSWAGEN AG53.06%164 563
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