Volkswagen AG(VLKAY)

Volkswagen recently announced that is has been tampering with software to make its vehicles show lower emission tests on official tests that on the roads. U.S regulators have stated that approximately 500,000 cars are affected on the North American markets. However, the problem appears to be even bigger than that, according to Volkswagen itself: 11 million vehicles could be affected worldwide.

As a result of the announcement, the share prices have been decimated instantly, falling over 20% over the past two days. The company has set aside reserves of $7.3 billion dollars to cover the costs of recalls. The biggest uncertainty with this situation is the actual amount of costs that Volkswagen will have to pay- the amount could be higher than $7.3, in worst case scenarios.
Other adverse factors for Volkswagen are lawsuits by shareholders and car buyers and loss of reputation.

With all that being said, I’m closely watching how the situation unfolds and believe that it could be a buying opportunity, especially considering how the market often overreacts to negative news.

Comments

  • edited September 2015
    I was also curious if this could shape to be a turnaround story. Similar to Chrysler. I wonder if they will buy back some stock?

    Volvo also hit a 5 year low this week, but i feel it is still over valued and D/E of 1.88 will keep me away

  • Hi cactusman,

    I am trying to assess how much damage was done by the fraud. There's going to be pollution fines, legal fines, litigation costs, shareholders class action and individual lawsuits and loss of reputation, which can be quite huge. Its still quite early to tell the extent of the harm that was done.
  • I am going to stay away in any case but am interested to treat it like a learning experience and see the story unfold
  • I will watch from the sidelines as well.

    It however reminds me of BP's deepwater horizon accident. BP's market cap drops 70B and they end up settling for 18.7B. Additionally BP had 5 years to settle and come up with that capital, their income until settlement was 60B+.

    With this Volkswagen scandal they must recall and fix these cars and settle any lawsuits. 482'000 cars in the US, and 11M worldwide with the emissions defeat as i understand it.

    If this is fixed with something as simple as a software update re-tuning the engine emissions one could find a real bargain. However the EPA can fine auto makers 37k per vehicle, also about 2k per vehicle in recalls, and lawsuits can put them at a loss of 20B+ over 2-3 years. There is also heavy headwinds with their Chief Executive departing and many other executives on the chopping block.

    The wide array of outcomes are what make me hesitant on this one. Price is the obvious catalyst for me, if 20B more falls off the market cap its a no brainer buy like BP during the spill. Reality is VW was valued over 100B earlier this year, its hard to imagine any scandal that 50B wouldn't fix. Its not like they spilled 3.2M barrels of oil in the gulf of Mexico right?
  • Volkswagen... or the importance of the 4 Buffett rules.

    Guys,

    I wanted to write a short experience regarding Volkswagen stock some days already. So about 1 year ago I became interested in Volkswagen. Everything looked great: One of the leading car companies with many great brands (Volkswagen, Audi, Porsche, MAN). Enormous economy of scales! Here big is really beautiful - these large companies have scaling advantages that many smaller competitors cannot match.
    Volkswagen also has a great image, has been growing revenues, earnings, etc. for many years. Okey, like all automotive companies it is very capital intensive, but this is more than made up by its cheapness. Even before the current turmoil, Volkswagen was mostly trading below book value and its P/E was below 10.
    So what's not to like here?

    At the time there was one big big issue: The debt. Volkswagen has a long-term debt load of about 70 billion euro. This is enormous. This is too much. And it clearly violates Buffett rule number 1:
    " A company must have vigilant leaders"

    So at the time I stayed away. And it hurt really bad not to buy this - such a great company at such a bargain prize.

    And now? Now we see proof, that Volkswagen indeed has a management problem. And in my opinion this was already visible in its debt load 1 year ago.
    No, I did not expect them to cheat in such a big way, of course. But it shows that not all is perfect in this company.

    This example highlights the importance of doing your homework. Check the 4 Buffett rules rigourously. It can save you a lot of money.

    I will stay away from Volkswagen as far as I possibly can.

    Thanks

    Christoph
  • Way to dodge a bullet Christoph that is awesome.

    VW is going to have a hard time digin out of this mess. Fines in America and now in other countries, cost of a recall, the HUGE blow to there brand. I am putting them in my sidelines watchlist with Lumber Liqidators
  • Initiated a small position early this week. Will incrementally add more, once and when they show signs of improvement.
  • Christoph,

    I agree with your avoid on the basis it doesn't fit Buffett's buy and hold possibly forever for Volkswagen. You were very wise missing the scandal.

    I feel that if interested one needs to evaluate the company with different framework. Scandal investing similar to AXP salad oil, BP oil spill, Nuclear scare with Japanease securities, Totota's gas pedal recall and the list goes on. Each of these instances the market has elected to overreact with Market Cap drops several times what the true impact has resulted.

    I have become more and more bullish on the drop as I am planning on a 10% position.

    Aswath Damadoran posted a great video as well that I found very rational.

  • Hmm, not to toot my own horn, but it appears that I made an acute call buying at $23
  • Someone can help me with some questions about morningstar calculation about VOW (Volkswagen).
    How do they calculate the BV when they have Preferred Shares?. (Usually I divided Equity for shareholders for the numbers of shares outstanding).
    At the Key Ratios/Financial Health how they calculate the Debt/Equity ratio?. For 2014 they indicate 0.75. When I look at the Balance Sheet my number is a lot higher (=261020/89991=2.90) I assumed that they substract the bonus or something similar.

    For the record I ussually use the morningstar info for a first sight, then I compare them with the balance.
  • It appears that there was Alpha to be had with this scandal. I don't even recall it in the news in 2017.....VLKAY increased 86% since scandal and S&P 500 increased 43%. The cash flows have shown there wasn't permanent earnings power impairment. They did take a hit on the chin in 2015, but the discount of the price more than compensated for that.

    I should have invested.....was in interesting valuation and exercise.
  • edited January 5

    Not so bad if you only got the 43% move in the SP500..

    Only loser, if you stayed in cash or bonds..
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