Earnings per Share, Dividend, and Current Year Performance of Volkswagen and Mercedes-Benz - Case Study Example

? Volkswagen & Mercedes-Benz Volkswagen Introduction Volkswagen is the largest manufacturer of cars in Europe having 62 production plants in fifteen European countries besides having 7 production plants in other continents. The company employs 400,000 people to produce about 30,000 vehicles each day and markets its vehicle in 153 countries. In 2010, the company produced 7,358,000 vehicles up by 21.5 percent compared to the year 2009. Strong First Three Quarter Results of the Current year The first three quarter results of the Volkswagen (VW) in 2011 have been astounding and the company has surpassed the profit figure recorded in the full year of 2010. For the third quarter the company posted net profit of €7.146 billion which is three times higher than the profit figure in the same quarter of the last year. The astounding company results are attributed to its investment in new products, manufacturing operations in the emerging markets like China. The company plans to invest heavily in developing markets simultaneously consolidating its position in developed regions such as Europe and Americas. (IHS global 2011) The following table represents year wise consolidated income statement of the company. Figures in Millions of Euros Items Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Total Revenues 108,897.0 113,808.0 105,187.0 126,875.0 Cost of Goods Sold 83,593.0 87,862.0 81,899.0 94,050.0 Gross Profit 16,399.0 16,250.0 12,733.0 20,742.0 Operating Expenses, Total 10,142.0 11,431.0 12,648.0 13,868.0 Operating Income 6,257.0 4,819.0 85.0 6,874.0 Net Interest Expense 413.0 344.0 -781.0 -626.0 EBT, Excluding Unusual Items 7,665.0 6,688.0 863.0 7,956.0 Income Tax Expense 2,421.0 1,920.0 349.0 1,767.0 Net Income 4,120.0 4,753.0 960.0 6,835.0 Source: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=VOW:GR Balance Sheet of Volkswagen Figures in Millions of Euros Assets Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Total Cash And Short Term Investments 15,638.0 11,394.0 21,890.0 22,794.0 Total Receivables 8,902.0 11,372.0 10,871.0 12,811.0 Total Current Assets 68,516.0 76,163.0 77,776.0 85,936.0 Plant And Equipment 25,689.0 30,030.0 31,745.0 34,550.0 Total Assets 145,357.0 167,919.0 177,178.0 199,393.0 Figures in Millions of Euros Liabilities Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Accounts Payable 8,202.0 9,085.0 9,734.0 11,628.0 Other Current Liabilities, Total 14,620.0 15,330.0 14,911.0 17,043.0 Total Current Liabilities 56,068.0 64,802.0 69,534.0 76,899.0 Long-Term Debt 3,645.0 2,240.0 9,272.0 8,989.0 Pension & Other Post-Retirement Benefits 12,481.0 12,829.0 13,793.0 15,265.0 Deferred Tax Liability Non-Current 2,637.0 3,654.0 2,224.0 1,669.0 Other Non-Current Liabilities 12,775.0 15,863.0 17,061.0 19,522.0 Total Liabilities 113,419.0 130,531.0 139,748.0 150,681.0 Total Common Equity 31,875.0 35,011.0 35,281.0 45,978.0 Total Liabilities & Equity 145,357.0 167,919.0 177,178.0 199,393.0 Source: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=VOW:GR&dataset=balanceSheet&period=A¤cy=native Cash Flow Statement (Figures in Millions of Euros) Details Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Net Income 4,120.0 4,753.0 960.0 6,835.0 Depreciation & Amortization, Total 6,427.0 6,738.0 4,900.0 5,058.0 Cash From Operations 15,662.0 2,702.0 12,741.0 11,455.0 Cash From Investing -15,812.0 -11,183.0 -9,675.0 -11,048.0 Total Debt Issued 9,609.0 17,477.0 16,998.0 7,910.0 Total Debt Repaid -8,524.0 -8,485.0 -10,225.0 -12,069.0 Total Dividend Paid -497.0 -720.0 -779.0 -755.0 Cash From Financing 787.0 8,123.0 5,536.0 -852.0 Net Change in Cash 547.0 -471.0 8,792.0 -8.0 Source: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=VOW:GR&dataset=cashFlow&period=A¤cy=native Financial Analysis It will be interesting to analyze the company’s financials from stakeholder’s point of view as the company’s progress in last few years has been exemplary and how the stakeholders can see the Key financials that can influence their decision. The fiscal year 2010 was an important year for the Volkswagen group when it began implementing its "Strategy 2018" by which the company wants to takes its sales to 10 million vehicles. Its gross profit target before tax by that time is 8 percent. Expanding the brand and the product selectively are the core elements and part of overall strategy (Volkswagen 2011). Operating Income of Volkswagen From shareholder's point of view operating income is quite meaningful as it informs how the company is faring in its operations and whether it is worth stay with the company. During financial crisis of 2008, the company's operations were impacted substantially and the operating income reduced by almost 23 percent. Operating expense had major impact in bringing down the operating income. The company had a major setback in the year 2009 when international crisis was at its pinnacle affecting its sales considerably. The revenues from the developed markets were down substantially which were partially offset by the reasonably good performance of emerging markets. The gross profit of the company was just sufficient to meet operating income. Surprisingly, the 2010 came with a big bang for the company registering almost 20 percent jump in total revenues. Operating income was an all time high and so the net income when compared with previous year’s performance. The current year’s performance shows the phenomenal growth of company’s revenue and operating income. Gross Margin and Solvency Ratios Gross margin of 17 percent and EBITDA margin of over 10 percent augurs well with the company. More than that the gross profit growth of the company is found to be almost 36 percent, which is commendable in the recessionary market conditions. On solvency, the Current Ratio of 1.2 and quick ratio of 0.9 signifies prudent financial management in the difficult market situations (Annual report 2010). Earnings/Share and Dividend Volkswagen’s annual earnings in 2010 were €15.13 showing almost 600 percent growths over 2009. Even current year’s three quarter earnings have shown a commendable growth over previous year. The company has a consistent record of paying dividends. Even for the recession hit year of 2009, the company did declare the dividend of €1.60 per ordinary share. This should be seen in contrast to the Daimler who preferred to skip the dividend for the fiscal year 2009. The dividend declared in 2010 was €2.20, which is almost 35 percent rise over previous year. The dividend yield (dividend/market price) at the current market price of share around € 110 is found to be at 2 percent which is quite decent by any standard (Annual report 2010). Shareholders are likely to get benefitted from the improved market conditions in 2012 when share price may move up from the last 52 weeks high of € 139. Mercedes-Benz The Mercedes-Benz has completed 125 years of its illustrious history this year and the company Daimler AG is one of the most successful passenger car companies of the world. The company's manufacturing operations are spread in 17 countries with sales and marketing offices in most part of the world. The company aims to spearhead its growth through innovation and green technologies. The company has the path breaking track record in inventing technologies that are most environmentally friendly. The company has current market capitalization of about €54.0 billion. The company sold 1,895,400 vehicles in the fiscal year 2010. Of which, passenger cars constituted almost two-third of the sale and balance came from the sale of trucks. The Mercedes-Benz brand is known in the market place as the most coveted brand in the world. The company believes in the philosophy of "the best or nothing" and is a leading manufacturer of the cars catering to the premium segment. The following table represents year wise consolidated income statement of the company mentioning some of the important parameters. Figures in Millions of Euros Items Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Total Revenues 101,569 98,469 78,924 97,761 Operating profit (loss)/EBIT 8,710 2,730 -1,513 7,274 Operating margin 8.6% 2.8% -1.9% 7.4% Net operating income 4,123 1,370 -2,102 5,120 Net profit (loss) 3,985 1,414 -2,644 4,674 Net income (loss) per share (€) 3.83 1.41 -2.63 4.28 Dividend per share (€) 2.00 0.60 0.00 1.85 Source: Annual Report 2010, p248 Balance Sheet Details of Mercedes-Benz Figures in Millions of Euros Assets Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Property, plant and equipment 14,650 16,087 15,965 17,593 Liquid assets 15,631 6,912 9,800 10,903 Other current assets 68,516.0 31,672 31,635 31,556 Total assets 135,094 132,225 128,821 135,830 Figures in Millions of Euros Liabilities Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Shareholders’ equity 8,202 9,085 9,734 11,628 Non-current liabilities 47,998 47,313 49,456 44,738 Current liabilities 48,866 52,182 47,538 53,139 Long-Term Debt 3,645 2,240 9,272 8,989 share capital 2,766 2,768 3,045 3,058 Source: Annual Report 2010, page 248 Cash Flow Details Figures in Millions of Euros Details Dec 31, 2007 Dec 31, 2008 Dec 31, 2009 Dec 31, 2010 Cash provided by (used for) operating activities 7,146 -786 10,961 8,544 Depreciation & Amortization 4,146 3,023 3,264 3,364 Cash From financing -25,204 -2,915 1,057 -7,551 Cash From Investing 26,479 -4,812 -8,950 -313 Free cash flow of the industrial business 7,637 -3,915 2,706 5,432 Source: Annual Report 2010, page 249 Financial Analysis Recession in Europe and other matured economies during 2008 and in subsequent year took a major toll of Mercedes-Benz when the company posted operating loss of €1500 million in the year 2009. Operative Income of Mercedes-Benz Ongoing financial crisis in most part of the Europe and Americas forced the company to close the year 2009 on negative operating margins. That was perhaps the worst performance of the company in several decades and the company skipped the dividend in that year. Per share earnings of the company was negative at -2.63 and the net loss stood at €2,644 million; however, the company recovered and regained its past glory posting net operating income of €5120 millions in the fiscal 2010 and again brought itself back in the dividend list. Most of the divisions of the company had double-digit growth. Revenue growth was registered 24 percent at €97.8 billion and earnings before interest and tax were €7.3 billion. The company is hopeful of the better results in the year 2011. Earnings per Share, Dividend and Current Year Performance The full year's earnings per share took a quantum jump in 2010 as that found to be at €4.28. The company also declared dividend of €1.85 in the last year which shows the confidence of the management in their plans and strategies. Continuing with the performance of 2010, the company continued to post spectacular results this year too. The current year of the company started with much better first quarter results (First quarter, 2011) with increase in EBIT by almost 70 percent at €2031 million and net profit doubled at €1180 million. The growth continued in the second quarter of the current year too as shown by the results, the earnings before interest and tax (EBIT) stood at €2581 million and net profit at €1704 million. The earnings per share of the company turned out to be quite decent at €1.51. Mercedes-Benz Cars division also had a best-ever performance after several quarters. (Second quarter, 2011) The third quarter performance of the company continued in the same light posting the net profit of €1360 million with earnings per share at €1.21. The results should be seen in the backdrop of recessionary market condition that is prevailing in the matured markets. Mercedes-Benz Cars business had third quarter shipments of 337,200 vehicles up from 317,500 recorded in the third quarter of 2010. It is to be noted that the third quarter results of the company are after taking into consideration the impairment cost in Kamaz and Renault of €23 million and €110 million respectively. While taking into account the exchange-rate effects, the revenue of the company has increased by 8 percent. The first three quarter results posted by the Daimler and the optimism shown by the management, the company is likely to end the year with much better earnings growth. The company has targeted return on sales at 10 percent by 2013 for Mercedes-Benz Cars and the company is making good progress to achieve that (Third quarter 2011). Solvency Ratio and Risk Mitigation Strategy The balance sheet of the company shows current assets at €37,450 million and current liability at €31,932 million as on December 2010.The liquidity ratio works out at 1.17 is quite safe to payoff for any impending liabilities The company has put in place the risk management guidelines and strategies on the issue of financial risks associated with interest rates, currency rates and equity prices. The guidelines are regularly reviewed and corrective action taken with respect to changes in markets and products (Annual report 2010). Conclusion and Recommendation The Volkswagen has got nine brands in the vehicle segment. It has positioned its brands well in most of the markets. The prudent financial management in the difficult times has not only braved the recession but also improved the results in fiscal 2010. The Volkswagen’s cost and process optimization should facilitate the company to achieve production and sales target of 10 million vehicles by 2018. Daimler is certainly a financially healthy and innovative company and Mercedes-Benz brand of the company is its most valuable asset. There is no doubt that the company will continue to have strong performance year after year due to prudent financial management and positioning its products correctly at various market segments. Moreover, the company has taken several steps to increase its stake in emerging economies so as to take advantage of the fastest growing markets in Asia and Africa. Volkswagen needs to accelerate the innovation in new technologies to reduce the emission levels and develop efficient battery operated cars to eliminate use of petrol and diesel as far as possible. Mercedes is good on innovation and concentrate more on niche marketing and develop new markets in coming years. Looking at the inner strength of both these companies–Volkswagen and Mercedes should continue to expand in their respective segments and reward their stake holders bringing more revolutionary products to cater to the vehicular needs of the market. Reference 1. IHS global (2011), IHS Global Insight: Country & Industry Forecasting, [Online] Available at http://www.ihs.com/products/global-insight/industry-economic-report.aspx?id=1065931729 [Accessed 10 December 2011] 2. Volkswagen (2011), News, [Online] Available at http://www.volkswagenag.com/content/vwcorp/info_center/en/news/2011/03/Volkswagen_Group_remains_on_track_for_profitable_growth_after.html [Accessed 10 December 2011] 3. Annual report (2010), Volkswagen, [Online] Available at http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/2011/03/Volkswagen_AG_Geschaeftsbericht_2010.bin.html/binarystorageitem/file/GB_2010_e.pdf [Accessed 10 December 2011] 4. First quarter (2011), [Online] Available at http://www.daimler.com/dccom/0-5-7153-1-1386871-1-0-0-0-0-0-16694-0-0-0-0-0-0-0-0.html [Accessed 10 December 2011] 5. Second quarter (2011), [Online] Available at http://www.daimler.com/dccom/0-5-7153-1-1411563-1-0-0-0-0-0-9293-0-0-0-0-0-0-0-0.html [Accessed 10 December 2011] 6. Third quarter (2011), [Online] Available at http://www.daimler.com/dccom/0-5-7153-1-1435663-1-0-0-0-0-0-8-7145-0-0-0-0-0-0-0.html [Accessed 10 December 2011] Read More