August 2, 2016

Audi AG’s Current Price Is Excessively Low


Summary

  • This idea was uncovered by screening through the adjusted ROA, P/E, and P/B ratios of 519 companies in the Consumer Discretionary sector with market caps of $500mn or above.
  • At €636.55 per share, Audi’s Adjusted ROA of 6.9% and Adjusted P/B of 0.6x drive an Adjusted P/E of 9.6x.
  • This set it up as an interesting long deep value idea given its fundamentals.
  • Audi’s stock has been punished since the VW CO2 emissions scandal in September 2015 as investors fear large fines and customer backlash.
  • These fears ignore consistent, strong historical profitability, substantial liquidity to handle fines, and expanding global operations.

Audi AG is in the Automobile Manufacturers sub-industry of the Consumer Discretionary sector. Its stock price is €636.55 as of August 1, 2016, with a market capitalization of €27.4bn. Audi AG (NSU) is traded on the Frankfurt Stock Exchange with headquarters in Ingolstadt, Germany.

To better analyze the company’s performance and valuation, we used the Valens-Research.com database, as it is difficult to make investment decisions without using performance and valuation metrics that have been adjusted for distortions and inconsistencies in financial statement reporting under both GAAP and IFRS. (For more detail, please follow this link.)

After careful analysis of both historical trends, as well as current valuations and analyst estimates, we believe the embedded expectations of Audi make it a very interesting deep value idea.

At €636.55 per share, Audi AG has embedded expectations of future performance that are excessively low.

To reach today’s stock price of €636.55, Audi’s Adjusted ROA (ROA’) would have to fall to 1.4% over the next five years, with a 5-year CAGR (compound annual growth rate) of 5.5%.

As indicated in Figure 1, given the firm’s current ROA’, Audi is trading at a substantial discount compared to its peers, and relative to its current Adjusted Asset (Asset’) levels.

FIGURE 1: Adjusted P/B (V/A’) to ROA’ Scatter ChartROA VA Scatter

FIGURE 2: Performance and Valuation Prime™ Chart

PVP Chart

What the market is thinking and why

Due to Volkswagen’s (OTCPK:VLKAY) recent emissions scandal, as well as concerns about recalls and potential fines, Audi is currently priced like a firm approaching bankruptcy. In September 2015, it was discovered that certain Volkswagen cars in the U.S. polluted five times more than permitted by law. As a result, many cars, including those under the Audi and Porsche brands, had to be recalled. Now, the companies are facing a lawsuit and potential fines of up to $1bn. Also, Volkswagen controls 99.55% of the share capital of Audi, while the free float amounts to 192,203 Audi shares. These represent a free float of just €144mn, which restricts the ability of large, institutional investors to trade the stock and invest in the company. Given these factors, and despite the fact that Audi has shown great success in the luxury car segment, the firm is trading at just a 0.6x V/A’. The market is pricing in expectations for the firm to have issues servicing fines and various lawsuits, and even considering concerns about liquidity, the current risk/reward balance makes Audi an interesting deep value name.


To find out why the market is wrong, and what are the catalysts to the market revising its expectations, continue reading this article at Seeking Alpha.