Varta: An alternative bet on electric vehicles?
Opdateret: 14 timer siden
Varta is known for their microbatteries that are used for hearing aids and in wireless headsets, and their consumer batteries. However, earlier this year the news broke that Varta also wants to produce batteries for electric vehicles in the future. Could Varta be an alternative bet in the very popular electric vehicle market?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
This analysis will be a bit different from what you are used to read in my blog. Varta has only been listed on the stock exchange since 2017, and because of that, I believe it is better to do a discounted cash flow analysis. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.
I should mention that I do not currently own Varta in my portfolio that you can choose to copy. I mostly know the company from their consumer batteries, which is natural as there is 80 % brand awareness of their household batteries in their key markets, in which EU is one. I have recently added Varta to my watch list but as always, I will keep this analysis unbiased.
Varta is a German company that describes themselves as company with business activities that encompass the development, production, and sale of microbatteries, household batteries and energy storage solutions in addition to research and development processes for these products. The company has existed for more than 130 years but didn't IPO until 2017. It should be noted though that they just bought back the household batteries division back in 2020. While most people know Varta from their household batteries it is their microbatteries and solutions segment that grows at a high pace, especially because of the demand of premium true wireless headsets, where Varta's CoinPower cells is the first choice for manufacturers such as Apple, Sony, and Samsung. The large brand awareness for their household batteries, and the status as the market leader when it comes microbatteries means that Varta has a strong brand moat.
Their CEO is Herbert Schein. He became the CEO of Varta in 2016 but has been a part of Varta for more than 25 years, where he held various positions. He has a degree in electrical engineering. He has been credited for the positive development of Varta, as Varta has become the innovation and market leader of small lithium-ion cells during his leadership. The Supervisory Board of Varta has been so impressed with his work that the unanimously decided to extend his contract ahead of time so his contract now runs until 2026. It is a bit hard to find much information about Herbert Schein, but he did come with some interesting things in an interview he did in 2018, where he mentioned that the battery sector is one of the most interesting sectors in the world, as the battery is the strategic component in most new products. He also said that research and development is some of the things he enjoys most in his job. When asked how he believes his employees will describe him, he said that he believes they would say that they can trust him, and that Varta for him is more than job, it is his life's work. Another interesting thing is that a research that investigated the engagement rate of all HDAX CEOs on LinkedIn, showed that Herbert Schein is by far the CEO with the largest engagement rate of 26 % among his followers, while the one in the second place had an engagement rate of 11 %. Finally, if looking at the return on invested capital (ROIC) it shows that Herbert Schein has delivered a ROIC of 10,7 % in 2018, 15,5 % in 2019 and 25,3 % in 2020. All in all, these things mean that I have confidence in the management of Varta.
I believe that Varta has a strong brand moat. And I feel confident about management as well. Later I will do a discounted cash flow model to calculate a price for Varta but before I do so, let us just have a look at some key financial metrics.
Down below we see some key financial metrics from the last 3 years. Remember that 2020 is a bit different than the other years, as Varta bought back the household batteries division, which is one reason we see such a growth in revenue. Nevertheless, revenue is never that important to begin with. Instead, I like to look at the margins, and it is very good to see that Varta has a gross profit margin of more than 60 % in all the years. The operating margin decreased a bit in 2020 but I believe an operating margin of 15,6 % is satisfactory. It is also nice to see an increase in EPS.
Before we continue to the discounted cashflow model, I would like to investigate the risks and potential of Varta. Let's us start with the risks. One risk is the price of raw materials, if the price of raw materials rises, it will hurt the margins of Varta. And as the world looks right now, it is very likely that we will see higher prices for raw materials. The record high freight prices will also hurt Varta, even though they tried to deal with by new production sites in Eastern Europe, which will result in shorter distances from core markets. Another risk is price pressures from competitors that are located somewhere else in the world. Especially their Asian competitors have some labor cost advantages compared to Varta.
In my opinion there is also a lot of potential for Varta moving forward. One of them is energy storage, where Varta Storage Solutions gained further market shares in 2020. Varta believes that energy storage has huge growth potential moving forward, and they plan on capitalizing on it, and their goal in the future is to support households so they can sell their surplus energy on the market. Large lithium-ion cells are what I wrote about in the headline, Varta wants to produce battery cells for electric cars. Their goal is to make battery cells that can be fully charged in 6 minutes that will be used for premium and sports electric vehicle segments. They expect the pilot line for the new battery cells to be done in the end of this year, and if everything goes well, plan to start production in 2024. They also expect their microbatteries division to grow moving forward, as they see a clear trend from cell phone manufacturers that cables are the thing of the past. And to deal with the demand, they have built a new production plant with highly automatic production lines, so they will be able to deliver more microbatteries.
Another thing that should be mentioned when investing in Varta is that their business is relatively independent from the macroeconomic environment. Meaning that negative trends in the macroeconomic environment should not results in any direct consequences in the business model, because most of their products are unaffected by economic cycle, as they are used in medical settings or in consumer segments.
I have now investigated the financials, risks, and potential of Varta. I will now look at the price by doing a discounted cash flow model. To do so I will need some numbers that you can see below. The numbers are the 2020 numbers, which I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 5 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. I decided to go with a higher option due to the business Varta operates in. The chosen discount rate of 10% is because it is usually between 9-12%. Remember that all the numbers made in these calculations are in millions.
I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. I believe that Varta will grow their EBIT with 15 % year over year moving forward. Like the EBIT growth, I believe that Depreciation & Amortization will grow with 15 % year over year moving forward, which is lower than the few years we have available, but I find it plausible. Finally, we have the Net Working Capital. I believe that the Net Working Capital will grow with 10 % year over year, which is lower than 2019 but higher than the other years. Unfortunately, I cannot find a smart way to share the whole sheet in here, but you get the numbers, so you can do it yourself. However, once I my calculations, I found that the intrinsic value of Varta to be 122 euros.
Having investigated Varta, I find the company to be interesting. I believe they have a brand moat, due to their market share and brand awareness. While I haven't been able to find much information about their CEO, I did like what I found. I also believe the the ROIC is an indicator that he has done a great job, and I'm confident with him being able to grow Varta moving forward. Varta does have good margins, and while we might see some short-term pressure on those margins due to the cost of raw materials and freights, I still believe it is a healthy business. Varta also seem to have a lot of potential to grow their business both in their core business but also in new sectors. I would feel comfortable at opening a position in Varta at the right price. Usually, I would like a 50 % discount to intrinsic value, but I think that Varta is a market leader in a business that will continue to grow, while they might also enter new markets. Hence, I would probably open a position even with less than a 50 % discount to intrinsic value.
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