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VLKAY - Volkswagen


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Volkswagen's share price has been taken out to the wood shed over the last few days due to the fraud in the computer programming in certain of their diesel engine automobiles (I say fraud, because the software was intentionally written to provide deceiving test results).

 

The market value of Volkswagen's common shares is about $60 billion today.  Earnings over the past couple of years have been about $12 - 13 billion each year.  Assuming the company can get through the current problems, the stock is currently selling for about 5 to 6 times "normalized" earnings.  The shares yield a 3 percent dividend.

 

Interestingly, whereas the software fraud mostly relates to VW models, Volkswagen actually earns most of its operating profit from it's Audi models.

 

Following is a link to their 2014 annual report (in English):

 

http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/2015/03/Y_2014_e.bin.html/binarystorageitem/file/GB+2014_e.pdf

 

Looks like this could be an interesting opportunity similar to Merck during the Vioxx problems, BP during the Gulf oil spill, etc.

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Volkswagen's share price has been taken out to the wood shed over the last few days due to the fraud in the computer programming in certain of their diesel engine automobiles (I say fraud, because the software was intentionally written to provide deceiving test results).

 

The market value of Volkswagen's common shares is about $60 billion today.  Earnings over the past couple of years have been about $12 - 13 billion each year.  Assuming the company can get through the current problems, the stock is currently selling for about 5 to 6 times "normalized" earnings.  The shares yield a 3 percent dividend.

 

Interestingly, whereas the software fraud mostly relates to VW models, Volkswagen actually earns most of its operating profit from it's Audi models.

 

Following is a link to their 2014 annual report (in English):

 

http://www.volkswagenag.com/content/vwcorp/info_center/en/publications/2015/03/Y_2014_e.bin.html/binarystorageitem/file/GB+2014_e.pdf

 

Looks like this could be an interesting opportunity similar to Merck during the Vioxx problems, BP during the Gulf oil spill, etc.

 

Well, VW relies on the VW models to achieve economy of scale. The Audi cars share a lot of parts with the VW models, so whether the profit is earned from Audi or VW is just an accounting question.

If US regulator along fines $16 bn plus EU, Korea and China fines some more, it will be quite a nightmare for the company.

Are there any bonds trading? I'd like to check the bond prices.

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If they make $12b in normalized earnings they'll be able to earn their way out of this. Say it is $25b in fines and recall costs worldwide, that's two or three years of profits (depending on how far sales fall). It'll take a while for the various governments to actually be paid the fines and it'll be a similar issue for the recalls. In ten years, people will remember this, but VW isn't going to stop being an excellent engineering company. People will still buy their cars and sales and profits will return.

 

Look at all the brands they own - Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda and Volkswagen marques; motorcycles under the Ducati brand and lots of commercial vehicles are sold under the VW brand. I'd say this is a powerhouse company that will survive and thrive. If I were in a position to take over the company (huge hedge fund/LBO, a competitor, Berkshire), I'd look really closely at this.

 

This seems like a great chance to buy fantastic assets at distressed prices. Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

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Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

Though I do agree with your other arguments. :)

 

Things that I would check before buy:

1. Are there any debt covenants that prevent spin off of the other brands?

2. What would happen to Audi's earnings if the economy of scale of VW is cut down?

 

 

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Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

 

 

This has no similarities to a pump and dump that is fed by investor psychology.

 

Volkswagen was valued at $120 billion based on their real earnings power.  Now the stock is valued at under $60 billion which would imply a massive loss in future earnings power.  This bears a lot of similarities to Olympus/BP/etc.

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I very much agree that Volkswagen has very interesting assets in its brands, and I doubt that their main brand will be severely damaged by this. I think it is even possible to handicap how much they will be fined by regulators, based on direct (if any) or indirect precedents (Merck, BP, etc.).

 

However, isn't the big scary unknown here the potential class-action lawsuits from actual clients worldwide? How do you possibly handicap these? Unless someone has a viable angle on this, it goes in the too hard pile for me.

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While class action lawsuits are a real possibility, the actual loss here isn't that great to the consumer. It is not like GMs ignition problem where actual lives were lost. While future profits and litigation costs will probably offset for 2 years or so, long term the company should continue to grow and survive. This reminds me of Toyota's stuck pedal problem, when more than anything they had to spend to regain customers trust. VW will have to do the same, but their premium brands will continue to do well and help the overall image of the company. I think this is oversold, but with fresh news coming out I wouldn't jump in just yet.

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While class action lawsuits are a real possibility, the actual loss here isn't that great to the consumer. It is not like GMs ignition problem where actual lives were lost. While future profits and litigation costs will probably offset for 2 years or so, long term the company should continue to grow and survive. This reminds me of Toyota's stuck pedal problem, when more than anything they had to spend to regain customers trust. VW will have to do the same, but their premium brands will continue to do well and help the overall image of the company. I think this is oversold, but with fresh news coming out I wouldn't jump in just yet.

 

I agree.  Predatory lawyers aside, who would want to sue?  My immediate thought was can I get a hold of one of these Audi's and not get it fixed?  The customer gets more performance and higher mileage without the need to bother with the expensive urea fuel additive.  Sounds like a win for the consumer to me.

 

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This could be a lot worse than some of you are thinking.  They intentionally broke laws designed to protect the public in order to generate more profits.  I would think be pretty easy for a lawyer to argue that this additional pollution caused people to die earlier or live less quality lives.  Look at the executive who got 28 years for lying about salmonella in their peanut butter which caused 9 deaths. -https://www.washingtonpost.com/national/health-science/a-life-sentence-for-shipping-tainted-peanuts-victims-families-say-yes/2015/09/19/e844a314-5bf1-11e5-8e9e-dce8a2a2a679_story.html

 

Plus, VW has to be made an example of here.  You can't have companies intentionally breaking laws and then not being seriously punished for it.  Otherwise, companies will go ahead and over-pollute and just pay the fines when they are caught.

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This could be a lot worse than some of you are thinking.  They intentionally broke laws designed to protect the public in order to generate more profits.  I would think be pretty easy for a lawyer to argue that this additional pollution caused people to die earlier or live less quality lives.  Look at the executive who got 28 years for lying about salmonella in their peanut butter which caused 9 deaths. -https://www.washingtonpost.com/national/health-science/a-life-sentence-for-shipping-tainted-peanuts-victims-families-say-yes/2015/09/19/e844a314-5bf1-11e5-8e9e-dce8a2a2a679_story.html

 

Plus, VW has to be made an example of here.  You can't have companies intentionally breaking laws and then not being seriously punished for it.  Otherwise, companies will go ahead and over-pollute and just pay the fines when they are caught.

 

Again, the peanut butter lead to direct deaths. Much easier to argue than pollution from 11 million cars lead to deaths as compared to all the other emissions around the world.

 

The gov't isn't usually in the business of making examples. They will get their money, and both sides will want to end this battle and settle as quickly as possible. If VW offers the gov't $10b tomorrow, is it worth the gov't to potentially pursue for an additional few billion with all the time and costs and risks of court involved?

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My immediate thought was can I get a hold of one of these Audi's and not get it fixed?

 

So, screw the environment and air quality for everyone, yes?

 

I'm just saying that the individual consumer has no motivation to sue.  He will not notice the extra pollution coming out of his tailpipe, yet he will notice the other benefits.

 

 

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This could be a lot worse than some of you are thinking.  They intentionally broke laws designed to protect the public in order to generate more profits.  I would think be pretty easy for a lawyer to argue that this additional pollution caused people to die earlier or live less quality lives.  Look at the executive who got 28 years for lying about salmonella in their peanut butter which caused 9 deaths. -https://www.washingtonpost.com/national/health-science/a-life-sentence-for-shipping-tainted-peanuts-victims-families-say-yes/2015/09/19/e844a314-5bf1-11e5-8e9e-dce8a2a2a679_story.html

 

Plus, VW has to be made an example of here.  You can't have companies intentionally breaking laws and then not being seriously punished for it.  Otherwise, companies will go ahead and over-pollute and just pay the fines when they are caught.

 

Again, the peanut butter lead to direct deaths. Much easier to argue than pollution from 11 million cars lead to deaths as compared to all the other emissions around the world.

 

The gov't isn't usually in the business of making examples. They will get their money, and both sides will want to end this battle and settle as quickly as possible. If VW offers the gov't $10b tomorrow, is it worth the gov't to potentially pursue for an additional few billion with all the time and costs and risks of court involved?

 

I'm not so sure about the gov't not wanting to make examples, especially when the company isn't one of the US based automakers. VW could be the BP of autos and this could get dragged out for years.

On top of that, every presidential candidate is preparing a sermon right now on how hard they'll be on polluters, and VW is going to be dragged out for a flogging each time. I'd hate to be Mr. Winterkorn right now. Although if he knew about this, and I'd be surprised if he didn't, then I suppose he deserves what's coming to him.

 

 

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My immediate thought was can I get a hold of one of these Audi's and not get it fixed?

 

So, screw the environment and air quality for everyone, yes?

 

I'm just saying that the individual consumer has no motivation to sue.  He will not notice the extra pollution coming out of his tailpipe, yet he will notice the other benefits.

 

Depends. If consumer is environment-conscious, they have motivation to sue. If there is a class-action, they will join anyway. If state authorities do not give consumer yearly state permit (sticker or whatever it's called in various states) and they can't drive the car, they will sue.

 

I doubt that state authorities will do the last thing (i.e. not give VWs/Audis yearly state permit), but who knows. CA might do it.

 

Edit: anecdotally, my friends are split on this. Some want to sue (but won't since it's too much trouble - but they will join class action). Some want to keep the car without "fix", but are concerned about what state will do with sticker checks.

 

BTW, VW dealers might be forced to "fix" if you come in with other issues. Or might "fix" without you even knowing (if it's software change). Though this is guesswork at this time.

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My immediate thought was can I get a hold of one of these Audi's and not get it fixed?

 

So, screw the environment and air quality for everyone, yes?

 

I'm just saying that the individual consumer has no motivation to sue.  He will not notice the extra pollution coming out of his tailpipe, yet he will notice the other benefits.

 

Actually, I'm sure there are a lot people who bought the car because it was supposed to be environmentally friendly who will not want to own it and will sue or at least add to a class action lawsuit which I'm sure many lawyers will be pleased to start.

 

And I think the people who think "He will not notice the extra pollution coming out of his tailpipe, yet he will notice the other benefits." will also think "if I say I'm upset about the environmental impact of my car, I can get a couple of grand out of VW" as he will notice the benefit of two grand in his pocket, but not notice the VW shareholders and management taking a beating.

 

 

And you do realize the fine for just removing a catalytic converter, which will give you better performance, but also hurt the environment is $5,000.  They do take things like this seriously.

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This could be a lot worse than some of you are thinking.  They intentionally broke laws designed to protect the public in order to generate more profits.  I would think be pretty easy for a lawyer to argue that this additional pollution caused people to die earlier or live less quality lives.  Look at the executive who got 28 years for lying about salmonella in their peanut butter which caused 9 deaths. -https://www.washingtonpost.com/national/health-science/a-life-sentence-for-shipping-tainted-peanuts-victims-families-say-yes/2015/09/19/e844a314-5bf1-11e5-8e9e-dce8a2a2a679_story.html

 

Plus, VW has to be made an example of here.  You can't have companies intentionally breaking laws and then not being seriously punished for it.  Otherwise, companies will go ahead and over-pollute and just pay the fines when they are caught.

 

Again, the peanut butter lead to direct deaths. Much easier to argue than pollution from 11 million cars lead to deaths as compared to all the other emissions around the world.

 

The gov't isn't usually in the business of making examples. They will get their money, and both sides will want to end this battle and settle as quickly as possible. If VW offers the gov't $10b tomorrow, is it worth the gov't to potentially pursue for an additional few billion with all the time and costs and risks of court involved?

 

I'm not so sure about the gov't not wanting to make examples, especially when the company isn't one of the US based automakers. VW could be the BP of autos and this could get dragged out for years.

On top of that, every presidential candidate is preparing a sermon right now on how hard they'll be on polluters, and VW is going to be dragged out for a flogging each time. I'd hate to be Mr. Winterkorn right now. Although if he knew about this, and I'd be surprised if he didn't, then I suppose he deserves what's coming to him.

 

I was waiting for this thread to start.  I wouldn't be rushing into this for sure.

 

If the CEO didn't know about this he is incompetent and should be fired, now.  If he knew about it he will be going to jail, and be fired.  Violating environmental regs. knowingly - how stupid could you be?

 

This gives the US presidential candidates something to focus on that is not a company in their own jurisdiction.  Opportunities like this are so rare. 

 

They will make an example out of them and hundreds of thousands of VW owners need their piece too. Every jurisdiction these guys sell in has emissions tests.  If VW doesn't get bankrupted I will be surprised.  No one outside of Germany will care if they get wiped out.

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What's the likelihood that there is a temporary ban placed on VW sales in the U.S. as a punitive action? Like, what if they had to pay a fine and weren't allowed to sell autos in the U.S. for the next 5 years? Is there a precedent for temporary bans of product sales of regulation infractions?

 

I seem to recall something like this happening before, but I can't place the company/product. Just curious if it could happen here which would have a large impact on those expected earnings.

 

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