CONSUMER CYCLICALS: Volkswagen (VW A3/BBB+/A-): 2Q24 Preview

We see risks for VW into results. With lots of moving parts, VW is, like others, trying to navigate the EV transition and associated costs, while dealing with pressure on labour costs and weaker macro in Europe. We see no signs of improvement in the difficult Chinese market so far. While Nissan, Stellantis and Ford disappointments all arguably had unique issues we see pricing pressure as a theme and results so far have heightened investor scrutiny on the sector. Best case scenario is probably in-line or a small beat and guidance reiteration along the lines of Mercedes-Benz. The narrative earlier in the year has been for a 2H recovery which we see as increasingly unlikely. 

• VW reports Thursday pre-open. Consensus expects revenues to grow 3% YoY. Deliveries were announced in July at flat YoY. Adj. EBIT is expected to grow 2%. Growth ex-China and better pricing conditions in those regions explain the uptick.
• 1Q24 was a miss for VW, in what had been well flagged as a weak quarter. Guidance was confirmed, limiting impact. Margin guidance was lowered earlier this month due to a factory closure which was largely credit neutral considering future cost savings. Consensus at 6.9% is within the 6.5-7% guidance range, and a miss driven by those costs would probably be forgiven.
• Inventory buildup due to model launches was a drag at 1Q. That will need to be well managed to protect FCF from here.
• Spreads have outperformed slightly since 1Q with only RENAUL and GM doing better in a largely sideways environment. VW has outperformed STLA (15bp), MBGGR (11bp) and BMW (6bp).