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Volkswagen Shares Calm, But Serious Questions Remain

Volkswagen Shares Calm, But Serious Questions Remain.

“maybe Strategy 2025, to be presented in mid 2016 will take VW in new directions”

Volkswagen leadership seems to have charmed investors into thinking the worst of the “dieselgate” scandal is now over, but serious questions remain after the CEO and Chairman addressed the media.

The good news was that there were no immediate revelations suggesting more bad news to shake up the stock price, which duly remained relatively serene at close to 140 euros. This is 16 per cent below the price on September 18 when news broke VW had deliberately misled the U.S. authorities into thinking its diesel engines were clean. The shares are still off 44 per cent from the high set in February this year.

Supervisory board chairman Hans Dieter Poetsch told a press conference in Wolfsburg, Germany, VW’s HQ, that in the U.S., the scandal was a chain of mistakes as engineers found they were unable to comply with U.S. stringent NOx requirements in some diesel engines.

“Looking back, we regrettably have to recognize that the developers involved in the EA 189 project quite simply could not find a way to meet the tougher NOx limits in the U.S. by permissible means, or at least they could not find a way they felt at the time to be meaningful and that fitted the timeframe and the budget they had been given,” Poetsch said.

Given the importance VW placed on using diesel power to transform its sales performance in the U.S., it surely is inconceivable that top management was unaware of the engineering difficulties involved. If management truly was unaware, the case for throwing out VW’s current system of governance and starting again is unanswerable.

Morgan Stanley analyst Harald Hendrikse isn’t too impressed with VW’s action to date. He said “peak” dieselgate uncertainty may be over, but pointed out over 450 lawsuits remain to be settled for up to 11 million VW customers. Hendrikse pointed out that the one billion euro capital spending cut announced recently, was really a reiteration of September news.

Mueller
“(yesterday’s) press conference added little new news, and in fact CEO (Matthias) Mueller committed to maintaining all 12 group brands, suggesting radical changes in capital budgets are still off the table. Amongst all the talk of change, maybe Strategy 2025, to be presented in mid 2016 will take VW in new directions,” Hendrikse said.

Hendrikse pointed out that at this stage of the Deepwater Horizon scandal BP shares had bounced off lows, but didn’t “perform or outperform” to the following three years.

“For VW, the timing of the autos cycle seems even more unhelpful, with VW sales, market share, and margins under pressure even prior to the scandal, and certainly not improving now,” he said.

Christian Stadler, Professor of Strategic Management at Warwick Business School, was more impressed though.

“The VW CEO has assured everyone that they will be able to manage this crisis. This is something I felt confident about all along. Sure, it will be very expensive, but ultimately it is doable for the automotive group,” Stadler said.

“It will obviously take a long time to recover from this scandal, but the plan to deal with the crisis seems robust,” he said.

Investment researcher Evercore ISI, which is looking for VW shares to hit 200 euros, took comfort from the fact no new misdemeanours were forthcoming, and said the event would help “de-risk” the stock.

“(while) cutting corporate jets and pulling back on excessive motor show displays may not have a material impact on the bottom line, it does say something for the change in attitude and culture that new CEO Mueller is looking to install,” Evercore ISI analyst Arndt Ellinghorst said.

Stadler
But Warwick University’s Stadler did remind investors of a possible development that would torpedo VW, not to mention most of the European mass car manufacturers.

“Saying that, a bigger long-term question or threat does remain. There could be a possible change in regulation and taxation of diesel. That would make these vehicles, particularly in Europe, less attractive, challenging VW’s product strategy,” he said.

European Union regulations impose harsh fuel economy rules by 2021 – the equivalent of an average 70 mpg – that can only be made with a high percentage of diesel engines.

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