Volkswagen Investors Welcome Increased Dieselgate Clarity.
“We believe VW will develop into a credible turnaround story and reiterate our buy recommendation”
Volkswagen shares fell after investors digested sketchy details of how it will compensate U.S. owners of diesels which wilfully flouted U.S. rules, and news of VW’s financial provisions for dieselgate.
Investment banks were surprisingly upbeat about VW’s prospects, not least because of the lack of detail of U.S. arrangements, and the possibility, not yet addressed, of the scale of lawsuits from aggrieved U.S. dealers and individual U.S. states for VW’s possible fraudulent advertising.
VW shares spurted after news Thursday it had agreed to offer U.S. owners of implicated diesel powered cars to either buy them back, repair them or compensate buyers for losses. On Friday VW raised the financial provision for the emissions scandal to 16.2 billion euros ($18.2 billion) from the previous estimate of 6.7 billion euros ($7.5 billion).
But by mid-day European time Monday VW shares had slid nearly 1.5%, according to Reuters’ Quote system.
Investors though liked the fact they were finally being given some more details.
“Volkswagen has made significant headway with regard to its litigation challenges in the U.S. by reaching an agreement in principle with a raft of U.S. authorities. The agreement doesn’t necessarily rule a line under the whole saga, but it will certainly go a long way toward putting a figure on the financial impact, when that figure does indeed arrive,” said Citi Research analyst Michael Tyndall in a report published before VW announced increased financial provisions.
Investment researcher Evercore ISI pointed out that deals so far didn’t include potential breaches under German law, but welcomed the increase in clarity and urged investors to buy VW shares.
“We believe VW will develop into a credible turnaround story and reiterate our buy recommendation,” Evercore ISI analyst Arndt Ellinghorst said Monday.
Morgan Stanley was a little less enthusiastic about VW’s prospects, warning that risks remain for the liability potential in the U.S., and from European compensation risks. It pointed out that only around 500,000 vehicles were implicated in the U.S., but closer to 10 million in Europe. There was also a threat to profits from a cyclical profit downturn.
“Uncertainty has been reduced but (the) value case is more limited than believed. We think the shares remain vulnerable to a further sell-off, though, if risk is once again challenged,” Morgan Stanley analyst Harald Hendrikse said.
When the dust has finally cleared from the dieselgate saga, investors will return to their long held worry that for VW to emerge as a normal company run for the benefit of its shareholders it needs to reform its governance. Unions control half the votes on the ruling supervisory board giving it a veto over plant closures. The German state of Lower Saxony has two board seats as well.
Recent reports from VW’s Wolfsburg headquarters suggest VW brand chief Herbert Diess is being denied the tools necessary to restore this most important part of the company to healthy profitability.
Evercore ISI quoted a reply from Diess in the German media, which asked if friction over his plans to reform the VW brand would lead to his resignation.
“No,” Diess was quoted as saying.