Gil’s Musings

Is Volkswagen Stock a Buy?

Bad things happen to good companies. Wading into treacherous waters after bad news can be a good investing tactic. We made such investments in BP in 2010 on the cusp of plugging the Macondo well (the day before, actually). We have also made successful investments in Target after the computer and credit card hacking disaster affecting millions of customers in 2013. We have also stepped on a few landmines along the way that did not work out as well.

We are currently choosing to sit out the Volkswagen debacle. It came to light last week that Volkswagen has been fudging the EPA emissions data

on their “clean diesel” cars and SUV’s for a number of years. Unfortunate on many fronts, but in particular for me since I own a diesel Audi SUV. I should have known that a large SUV with 29 MPG and lots of power and almost no maintenance couldn’t also have low emissions.

This debacle has already cost the CEO his job. Apparently, employees engaged in a systematic way to skew the actual emission test results by dialing back certain on-board computer settings that produced the minimum emissions test results, while never intending to release the cars tuned in such a way. The settings were returned to a better performance mode before being sold, with certain nitrogen oxide emissions that might be 20x the reported results. This will likely have profound and long lasting effects on Volkswagen, Porsche, and Audi brands.

This seems to be a different scenario from Target, where computer issues were caused from outside the company, and were allowed by acts of omission, not commission. There was also no internal conspiracy to cover up the issue, so the brand would likely be less damaged by the event. Accordingly, sales at Target quickly snapped back as consumers lost interest. That is unlikely with Volkswagen, since there appears to have been a conspiracy. That can reflect a cultural issue within the company that can run deep, and is often difficult to root out. Cheaters never win.

Then there is liability. The fines for knowingly misrepresenting test results to the EPA are about $35,000 per car. There appear to be around 482,000 cars sold in the US affected by the emission testing scandal. The worldwide number may be as many as 11 million cars equipped with software to game the emissions test results. The potential $18 Billion in US fines may be just scratching the surface. Then there are the class action lawsuits. Imagine the cost of recalling and retrofitting with engines that comply– impossible. So maybe they simply dial back the settings into compliance. No thanks, I like being able to pull a 7,000 pound trailer, whether I do so or not. And then there is diminished resale value. Who pays for that?

Volkswagen does have $35 Billion in cash. But they also have liabilities already. With $88 Billion in shareholder equity reported last quarter, the worst may not be over. So yes, Volkswagen stock lost a third of its value last week. It would have to get quite a bit cheaper yet for me to see a risk worth taking.

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