More VW Bad News Makes It Hard To Figure Long Term Costs.
“Arguably, VW is the only Autos stock that can realistically double over the coming 9-12 months”
“In fact, we believe VW to be the greatest cost-reduction story in global autos”
Investors are trying to peer into the future to calculate just how much the “dieselgate” scandal will cost Volkswagen, but every time they think all the bad news is out in the open, along comes more.
But some analysts see a buy case for VW shares which have shed more than 50 per cent this year, while its unreformed high cost base gives it more turnaround potential than its competitors.
Barclays Equity Research estimated the total cost to VW of dieselgate at €25 billion spread over two years. It made that estimate about 10 days after Volkswagen revealed its upmarket and highly profitable Audi and Porsche subsidiaries were now implicated, and that the contagion had spread from diesels to gasoline powered vehicles too.
The trouble is, a day after Barclays decided it was now possible to take a broad view of the impact of the scandal on VW, along came another announcement from the company saying more gasoline engines than previously disclosed were implicated in the deception to falsify fuel economy. Originally, VW said about 800,000 1.4 litre VW Polo vehicles were tainted. The latest development said another 430,000 gasoline engines were implicated, and these included Audis, Skodas and Seats too.
The fuel consumption deceptions could be more serious because countries like Germany, France and Britain use CO2 ratings as the basis for tax. VW has said if any extra tax is payable, it will pick up the tab. VW owners could sue to compensate them for the higher running costs too.
Fitch Ratings and Morgan Stanley have not attempted a guesstimate of the costs, on the grounds it is too soon to know. Estimates range as high as $60 billion, which would put it in the same class as the BP Deepwater Horizon oil rig disaster. Worst case scenarios include VW being forced to sell off luxury brands like Bentley or Lamborghini. Audi and Porsche could be on the block too.
Detailing its €25 billion estimate, Barclays said it includes €10 billion of recall costs, €8 billion of U.S. fines, €2 billion for fines outside the U.S., €1 billion for U.S. class action lawsuits, €2 billion of economic risks for CO2 deficiencies, and €2 billion of potential CO2 fines.
There will be other ramifications too.
“Future sales will be impacted by fears of declines in the residual values for VW. Resale values of models affected by the scandal have fallen significantly and models are taking longer to sell. The full repercussions of this are unlikely to be seen until the November sales data. We now expect 2015 sales volumes to be down by 2.5 per cent compared with VW’s guidance for flat sales, and revenues to increase by 3.2 per cent compared with VW’s four per cent target,” said Barclays’ analyst Kristina Church.
But all this gloom and doom has become a positive in the eyes of some analysts.
“Arguably, VW is the only Autos stock that can realistically double over the coming 9-12 months,” said Evercore ISI analyst Arndt Ellinghorst.
VW’s stock price has fallen 53 per cent since mid-March, and 30 per cent since the dieselgate scandal broke September 18.
“It is hard to disagree with the fact that VW does have very strong brands and more cost cutting potential than any other (manufacturer) globally. The combination of the opportunity to improve VW’s culture and turn it into a more efficiently led company in conjunction with brand equity and efficiency improvements make it an interesting stock, in our view,” Ellinghorst sad.
Ellinghorst said the next trigger for VW’s stock price will be when all the internal probes have been completed. This should take two to three more weeks barring any more unexpected issues.
Failed corporate culture
“It is obvious to us that VW’s crisis is a pure function of a failed corporate culture and morbid governance rather than the technical feasibility of producing engines that meet regulatory requirements,” he said.
Bernstein Research analyst Max Warburton also declines to guess as to the final cost to VW, saying for many VW has become “uninvestable” because of the uncertainties. But he agrees with Ellinghorst that now might be a good time to invest. The scandal could be a positive catalyst for VW to accelerate cost reduction and change.
“We believe it’s possible – and the opportunity could be huge. In fact, we believe VW to be the greatest cost-reduction story in global autos,” Warburton said.
“Some may consider this analysis to be irrelevant right now – but at some point the scandal will reach its nadir and the discussion will return to VW’s fundamentals. We believe there is opportunity here that eventually will emerge,” Warburton said.
Most global manufacturers like Ford, GM and Toyota are running “a pretty tight ship” and making record margins. European rivals Peugeot-Citroen, Renault, Fiat and German peers BMW and Mercedes have cut costs significantly.
“But VW still has a pre-crisis (2008) cost structure. In fact it has a cost structure that’s worse than pre-crisis,” Warburton said.
Barclays’ Church warns though that the future of VW is questionable.
“The prevailing view has been that the operational business will remain largely unscathed by this scandal. We must admit to have been subscribers to this theory too. The idea was that car buyers care a lot more about the cost of what they putting into the car than what comes out the end,” Church said.
Church awaits November sales data for a better idea of exactly what the impact will be.