The U.S. markets may be closed on Wednesday, but European stocks are still on the move as Volkswagen (VLKAF) moves up amid a potentially thawing EU-U.S. trade relationship.
Shares of the Wolfsburg, Germany-based automaker were up earlier as an alliance with U.S. automaker Ford (F) is beginning to come together. Such an alliance might entail more U.S. plants, something that suggests a warming relationship with U.S. trade officials after the automaker met with President Trump on Tuesday.
Ford CEO Jim Hackett and VW CEO Herbert Diess have both confirmed the discussions are underway, specifying that talks are underway to produce electric vehicles on U.S. soil. However, both made clear that no equity stakes would be involved in the partnership.
Mit Guten im Verein, ist besser als allein ~ With good company is better than alone
The synergies available would be a boost for both Trump, who could claim the creation of jobs to fill the gap left by General Motors (GM) plant closures that have left 14,000 jobless, and the potential for closures at Ford. It's a "gewinnen, gewinnen", so to sprechen.
"All signs are guiding to the right direction at the moment," Peik von Bestenbostel, the chief spokesman for Volkswagen said in a statement, before clarifying "nobody knows what the decision of the president may be."
....I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN— Donald J. Trump (@realDonaldTrump) December 4, 2018
So, with the macro argument at least trending in the right direction, according to all sources aside from the "Tariff Man" in the oval office, the stock implications seem worthy of examination.
The situation has been seen as a serious catalyst for the stock after VW mentioned the possible increased partnership in its planning round update in November.
"Whilst a full agreement remains to be signed, we would anticipate a positive reaction from investors if VW could support its targets with further deal-related synergies and cost reductions," Morgan Stanley Harald Hendrikse wrote.
He added that a signed agreement would present a firm catalyst but retained his " Market Perform" rating in the absence of a clear and fully inked agreement.
It is worth noting that the firm has also been successful in attacking the U.S. market, posting an increase in year over year auto sales in the U.S., particularly with SUVs.
"Our SUV momentum continued despite a difficult month for the industry," said Derrick Hatami, executive vice president of sales, marketing and after sales for VWoA. "Our top three volume leaders were all up year-over-year and our SUV portfolio percentage has grown steadily thanks to the Atlas and Tiguan."
The increased exposure to larger vehicles popular in the U.S. would only increase with the aid of Ford.
"More than a net reduction in spending we see upside from VW working with Ford and increasing share in what have been some of the highest segments of commercial vehicles including pickups, where the group is structurally under-represented," Jefferies analyst Phillippe Houchois said.
He maintained a "Buy" rating based on his bullish take on the talks.
Aus Schaden wird man klug ~ Adversity makes one wiser
Another key to the company's move forward with Ford is its stated focus on electric vehicles in its hypothetical U.S. operations.
"We believe there could be significant synergies in co-operation on European electric vehicles, and possibly also in autonomous technologies," Hendrikse said of the potential agreement. "We agree with VW's view that it will be the most profitable maker of electric cars due to economies of scale. No other OEM is attempting anything of the scale that VW is doing, and we applaud this direction."
To be sure, he noted that the move will be expensive given the lessened margins of electric vehicles.
The company recently noted that the expansion in electric vehicles will cost about €44 billion over the next five years, adding to the company's already sizable debt load.
Still, the push to greener cars should not only represent the future of the auto industry, according to analysts, but also help the company move past the "Dieselgate" fiasco that has battered the automaker's reputation in recent years and is still attracting scrutiny from Brussels.
Given the overall positivity around the meetings, and the company's potential upcoming catalyst of entry into the U.S. market, it's garnering a pop in shares as the market attempts to milk a rare bull as the exchange sits empty on Wednesday.