Opinions have been divided on Varta for some time now. While the stock has been a favorite among private investors since its stock market debut in October 2017, the share is equally popular among short-sellers. The optimists point to the ongoing trend toward wireless electrical devices, which is driving demand for Varta's small lithium-ion button cells. The pessimists, on the other hand, see the high valuation and possible pressure on margins due to Asian competitors as a brake on the share price.
To justify a price-to-earnings ratio of more than 40 for expected earnings for this year and more than 30 for 2022, no disappointments are needed. And when one does occur, the cold shower promptly follows. What this can look like was shown in the past few days in the course of the presentation of the figures for the second quarter. The MDAX member lost around one fifth of its market capitalization within a very short period of time.
What happened? Although the Apple supplier increased its sales by 1.8% to EUR 397.6 million in the first half of the year, this was less than market participants had expected. In addition, household batteries in particular were responsible for the small increase, while the small cell business was less in demand. However, these account for more than half of the group's sales.
On top of that, the margin development does not seem to satisfy investors. In the first six months, Varta reported an adjusted operating return of 28.2%, which was somewhat lower than analysts had expected. The margin is also currently quite a bit away from the full-year forecast. For 2021, the company has set its sights on a figure of around 30%. CEO Herbert Schein is sticking to this target thanks to an expected stronger second half of the year.
While the rumor mill was still bubbling with rumors that Varta might raise its targets somewhat after the second quarter, one can be glad today that the company is at least sticking to the old forecast. While CEO Schein is counting on an increasing business development in the field of true wireless stereo headsets, analyst Robert-Jan van der Horst from Warburg Research, for example, assumes that this market will lose momentum and also become increasingly competitive. Investment bank Kepler Cheuvreux is also skeptical and believes that the 2021 targets can only be met if the launch of Apple's AirPods 3 is a success.
So in the short term, the small button cells will decide the weal and woe of Varta. In the long term, it will be important whether the Swabians are currently setting the right course for the future. The company has high hopes for its entry into the automotive business. There is already a first customer from the automotive sector for the newly developed high-performance round cell V4Drive. According to media reports, this customer is none other than Porsche. The battery is said to have a charging time of only six minutes. In addition, the Ellwangen-based company has announced plans to develop other, larger lithium-ion round cells in the future.
However, this is still a pipe dream and Varta will have to continue to hope for good business with the entertainment industry until it is a resounding success in the e-car sector. So it will be no easy task to bring the volatile stock back into an upward trend. Especially since the stock broke the 100-day line to the downside during the recent sell-off and also tested the 200-day moving average. The bottom line is that Varta stock is roughly flat on a one-year horizon.
If this sideways movement continues, it would be the perfect environment for the new barrier reverse convertibles. In the event of a prolonged consolidation, a double-digit percentage return can be achieved. The CHF product has a coupon of 15.20% p.a., while its EUR-denominated counterpart offers the prospect of an even higher yield of 15.60% p.a.. For both BRCs, the barrier is fixed at 69% of the starting values, and the maximum term is one year. Due to the soft callable function, however, this can be reduced; the first observation date takes place after six months.
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