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Volkswagen Bets Big on EVs, Revs Up 5-Year Investment Plan

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Volkswagen AG’s (VWAGY - Free Report) electric transformation continues to gather steam. The German auto giant is betting big in the electric vehicle (EV) space and giving solid competition to the pioneer of electric cars, Tesla (TSLA - Free Report) . In a bid to keep pace with the EV wave and retain its leading position in greener vehicles’ transition, Volkswagen recently unveiled plans to rev up spending on electric cars, hybridization and digitization.

Volkswagen’s EV Efforts Get Into High Gear

Per the new five-year (2020-2024) investment budget of Volkswagen, it will be spending 60 billion euros in electric cars, hybrid technology and digitalization over the said time frame. The investment budget depicts a 36.3% increase from the previous five-year plan. The €60-billion investment plan marks more than 40% of the firm’s spending in property, plant, and research and development costs during the planning period. The share of spending on next-generation technology has increased from 30% to 40%.

It is to be noted that while €33 billion will be spent on electric mobility alone, €27 billion will be directed toward hybridization and digitalization. Increasing pressure to meet the stringent pollution targets and changing dynamics of the auto industry to sharpen focus on greener cars resulted in the rise in Volkswagen’s investment budget.

The firm also updated its 10-year targets. Through 2029, Volkswagen has pledged to launch 75 all-electric models, up from the prior forecast of 70. Over the next decade, it intends to produce nearly 26 million e-vehicles compared with the previous target of 22 million. It aims to sell around 6 million hybrid vehicles by 2029.

These commitments are likely to put the firm in a strong position to comply with EU emissions standards that will be phased in from 2020. The German carmaker could face a penalty of billions of euros from Brussels, in the event of non-compliance with the emission standards.

Volkswagen to Focus on Operational Efficiency

Production of ID.3, one of Volkswagen’s most ambitious EV projects, began a couple of weeks ago, with the first set of deliveries expected in 2020. For the first time, ID.3 features Volkswagen’s Modular Electric Toolkit, also known as MEB platform. The Volkswagen Group is ready to produce 33 more vehicles on the MEB platform in the next three years. The firm’s CEO Herbert Diess expects the new ID.3 electric vehicle to be 40% cheaper to build than the Golf EV.

Amid economic slowdown concerns, the company has been making efforts to increase productivity and efficiency. Reducing production costs by gaining economies of scale will be the key to Volkswagen’s target of ramping up production and investment in EVs, with no reduction in profit margins. To offset the high spending on electric cars, the firm will ramp up sales of higher-margin SUVs and focus on lowering the cost of developing electric cars.

For 2020, the company expects operating profit margins within 6.5-7.5%, same as the forecast for 2019. For 2025, the firm is striving for operating returns on sales of around 7-8%. Moreover, even amid the high spending plans, the firm anticipates net cash flow to be at least 10 billion euros in 2020 and 2025, higher than this year’s target of 9 billion euros.

Zacks Rank & Stocks to Consider

Currently, Volkswagen carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Auto-Tires-Trucks sector are Spartan Motors, Inc. (SPAR - Free Report) and BRP Inc. (DOOO - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Spartan Motors has an estimated earnings growth rate of 85.4% for 2019. The company’s shares have surged 123.4% in a year’s time.

BRP has a projected earnings growth rate of 18.5% for the current year. Its shares have gained around 39.2% over the past year.

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