Some Advice For The Brave; Now Might Be The Time To Buy VW
“For too long, VW has been run for global domination and sheer growth rather than efficiency and value creation”
As Volkswagen grovels before Congress and estimates of the final cost of dieselgate mount, investors are being urged to buy VW shares on the grounds that on the stock market at least the crisis can’t get any worse.
That’s the view of Germany’s Berenberg Bank and investment bank UBS in London.
Some investors may raise their eyebrows at this advice. After all, Volkswagen’s Chairman designate Hans Dieter Poetsch has warned that the diesel-emissions scandal could pose “an existence-threatening crisis for the company.”
Meanwhile Volkswagen shares have taken a huge hit on stock markets since news broke the company had deliberately falsified data on noxious diesel emissions to the EPA. The CEO resigned. 11 million diesel powered cars were recalled. The new CEO, Matthias Mueller, said VW will slash its investment programme. Estimates of the final cost to VW of the scandal are unknown, but range as high as $50 billion.
But Berenberg Bank analyst Adam Hull, in a published research note to investors, said VW is damaged and the share price is volatile, but now is the time to buy.
“At a share price of 93.50 euros, we think many negative assumptions are priced in. Even if we assume VW just pays 25 billion euros ($28.2 billion) in legal settlement (perhaps 20 billion euros in the the U.S. and 5 billion outside) for rigging emissions test in the U.S. and having illegal software in Europe, we would still need to ascribe a negative value of 47 billion euros to the VW Passenger Cars brand to reach VW’s current price,” Hull said.
UBS analyst Philippe Houchois also advised investors to buy VW shares, in a research note headed “From ‘Too big to succeed’ to ‘Too big to fail’, saying VW may look uninvestable but is pricing in a lot of negatives.
Both analysts posted target share prices of 150 euros.
UBS’s Houchois said he had assumed a total cost to VW from the scandal of 35 billion euros ($39.5 billion).
Since Mueller said last week that VW’s investment programme must be slashed, speculation has mounted as to just where the axe might fall. There’s the expensive VW Phaeton project, pursued by former chairman Ferdinand Piech, which sought to produce a premium sedan to compete with products like the Mercedes S class and BMW 7 series as though VW didn’t already own Audi, which makes the flagship A8 limousine. The Bugatti, which makes a few 200 mph supercars every year, loses heavily, but scrapping these two projects would not save the kind of money that would make much difference to the current problems.
According to equities researcher Evercore ISI, VW has let its capital spending run wild as it pursued world sales leadership by 2018 with less thought to actually making profits.
“For too long, VW has been run for global domination and sheer growth rather than efficiency and value creation. This has created the world’s most complex carmaker. VW has great brands but the business is under-managed,” said Evercore ISI analyst Arndt Ellinghorst.
Save €20 billion
“Looking at VW’s costs base one has to conclude that something has gone terribly wrong since 2010. Pretty much all cost ratios have gone through the roof unparalleled compared with any other global (manufacturer). If VW were to return to costs ratios reported in 2010, it could save a total of 20 billion euros ($22.6 billion),” said Ellinghorst.
Ellinghorst cautioned that this wasn’t achievable within one or two years, and that some of the 20 billion might be counted double, but was using the number to make the general point.
UBS analyst Houchois hoped that mid-term VW might replenish funds by selling off its trucks, or dispose of automotive retailer Porsche Salzburg.
Berenberg Bank’s Hull said VW shares have lost 30 billion euros ($33.9 billion) in value since the diesel story broke. The extent of damage to VW and Audi’s reputation will depend on who at VW knew about the deception, when they knew and how VW rectifies the problem.