WSJ article about Audi/VW

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COMMON SENSE
Auto Shares Beckon, And VW in Particular
APRIL 14, 2010
By JAMES B. STEWART

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In case you couldn't read it online, here is the full text:

COMMON SENSE
APRIL 14, 2010
Auto Shares Beckon, And VW in Particular
By JAMES B. STEWART
Two years ago, I approached the New York International Auto show with what seemed a simple goal: a comfortable, attractive, reasonably high-performance car that got at least 30 miles to the gallon. The pickings were slim. The finalists were the Mini Cooper Clubman, the Ford Escape Hybrid and the diesel Volkswagen Jetta SportWagen. But there weren't many other contenders. Even some hybrids didn't meet the 30 mpg standard.

What a difference in just two years. Despite the debilitating financial crisis and recession, car makers seem to have poured their R&D budgets into exactly what I was looking for. There's even a new category for such cars: the "environmental performance" segment. My previous finalists were all there, still boasting 30-plus fuel efficiency, luxury touches and a fun driving experience. Mini is even introducing what I suppose could be called an SUV—the Countryman, which goes on sale next year and features all-wheel drive. (Its fuel-efficiency ratings haven't been released yet.)

Ford Motor's new "world car," a single design for a multinational market, easily fits the bill. The car, christened the Fiesta, goes on sale this summer in the U.S. and features an estimated mpg of 40 on the highway and 30 in the city. The model I sat in sported leather seating with contrasting piping, ample legroom and a hatchback leading to a surprisingly large cargo space. It made me eager to drive it. (Ford has also brought its hybrid technology to the luxurious Lincoln MKZ.) Crowds at the show were also admiring the hybrid version of Ford's Fusion (Motor Trend's 2010 Car of the Year), as well as several new Focus models. Even the new Mustang promises 30 miles to the gallon, at least on the highway. As a Ford shareholder, I keep worrying the news can't get much better for Ford. But that is a nice problem to have and, after this visit, I feel my investment is in sound hands.

One other company also stood out for its array of
fuel-efficient new models. Volkswagen now offers its clean-diesel technology in the U.S. models of the 2010 Golf TDI hatchback and the more-luxurious Audi A3 TDI. (Volkswagen owns Audi, which last week reported March sales jumped 22%.) Green Car Journal named the diesel Audi A3 this year's Green Car of the Year, succeeding last year's winner, the diesel Jetta. Both the Golf and the Audi boast fuel ratings of 42 highway/30 city. A Volkswagen spokesman at the show emphasized that clean-diesel technology offers high fuel standards in both city and highway driving, whereas the hybrid technology's advantages are largely confined to urban driving. Still, given the popularity of hybrids in the U.S. market, Volkswagen plans to introduce hybrid models within the next few years.

At the show I spoke to Ron Stucker, a potential buyer from Staten Island, N.Y., who was eyeing the A3 along with some friends. Like many Americans, he was initially wary of diesels, but his wife bought a Jetta TDI model. Now, they like it so much he was shopping for another one, at least until he spotted the Audi A3 TDI. "I'd definitely consider the more-luxurious model," he said. So would I when my current lease expires.

In my view, when investing in auto makers or buying a car, it's ultimately about vehicle quality. With the U.S. just emerging from a recession, it's still a good time to own auto shares. Cars wear out and have to be replaced. I've read estimates that put the replacement rate at anywhere from 12-16 million vehicles a year in the U.S. alone. With sales having slumped last year to an annual sales rate of about 10 million vehicles, that means there's lots of pent-up demand, which is showing up in recent strong percentage sales gains.

There may also be pent-up demand for VW shares. Many potential investors (including me) were likely put off by the recent convoluted, long-running and soap-operatic takeover battle between Porsche and Volkswagen, which led to wild swings in Volkswagen's share price (and the demise of many short sellers caught in the squeeze). Now the battle is over, Porsche has abandoned its effort, and the two have agreed to merge, with Volkswagen essentially acquiring Porsche sometime in 2011.

Volkswagen shares trade on the Frankfurt market, as well as in the U.S. The company is in the midst of a $5.5 billion secondary offering of what the company calls preference shares, nonvoting shares that offer a marginally higher dividend, to finance the Porsche deal. The preference shares should be more liquid and actively traded. Still, some analysts are recommending the ordinary shares as relatively undervalued.

Given the company's tortured history, investors should do their own research. But VW's strong product lineup and recent sales gains may well compensate for the risks.

Printed in The Wall Street Journal, page C4
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