So Volkswagens been lying to everyone for seven years.
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The German carmaker just recently admitted to outfitting millions of their diesel-powered cars with software designed to fool anyone who tried to test the emissions of their vehicles.
German auto-industry supplier Bosch supplied the software to Volkswagen, a program able to activate emissions-control devices when it detected that testing was taking place and then deactivate them afterward. This meant that Volkswagen’s diesel Golfs and Jettas could pass the emissions test with flying colors…and then continue polluting right after.
The number of cars affected worldwide: 11 million.
Anything Goes (Until you Get Caught)
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There are two types of engines – diesel and gas. Diesel is more efficient, and provides more mileage, but is dirtier in terms of pollutants. This type of engine is popular in Europe (where emission standards are lower than the U.S.) but never really caught on in the U.S. because no one could develop a viable model that could pass the stricter standards.
But Volkswagen wanted a piece of the U.S. and it all started when VW were developing a new diesel engine for the U.S. market. At the time auto companies were using something called an AdBlue urea exhaust-treatment system – a process that allows diesel engines to exhaust harmless nitrogen and steam rather than toxic nitrogen oxides.
The estimated cost of adding one of these systems: $355 per vehicle.
VW finance chiefs kind of looked at that and went, “Nah. We’re gonna go ahead and perpetuate fraud on the entire world for nearly a decade instead, thank you very much”.
Emissions are taken very seriously seeing as nitrous oxide is a leading source of atmospheric pollution and smog. The scope of the pollution is shocking: certain VW models were emitting between 15-35 times more nitrogen oxides than they should be. As a result, the Environmental Protection Agency (EPA) is threatening to fine VW as much as $18 billion and the Department of Justice is considering pursuing criminal charges against the German automaker.
Meanwhile…the damage may already have been done. Volkswagen’s reputation is in the gutter and their stock price has crash landed like a paratrooper without a parachute, losing a third of its market cap in a week.
But…Should you Buy it Anyway?
The company may be a global pariah, but that hasn’t stopped some investors from picking up shares on the cheap. After all: one man’s emissions standards circumventing trash is another man’s treasure.
It may not be a bad play. Volkswagen was an incredibly popular brand (one which houses Audi and Skoda as well) and is the world’s largest automaker by sales. This scandal will set them back, no doubt. But if they survive, it could be profitable for an investor willing to wait it out.
The question is: is buying beaten-up crisis stocks a good strategy? Do you bet on Mike Tyson to win when he comes back after an injury or just stay away?
It depends on the business. JP Morgan was able to record a stock rise of 22% while paying out $20 billion in fines in 2013. They also recorded profits of $18 billion that year. All told, the investment bank paid out $35 billion in fines over a three and a half-year period while the stock price went from $38/share to $60/share – so it is possible.
Remember British Petroleum and the Gulf of Mexico oil spill? If you were able to time it perfectly and buy BP at its absolute lowest point after that disaster, then you’d be up about 60 cents a share. Course, perfect timing never happens and it’s safe to say that investment would have been a loss. BUT – it’s important to note that BP recovered from a low of $29 a share to over $50 before the oil crash that took its share price back down to $29.
On the other hand, Toyota has done remarkably well after their recall issue in 2010, their share price rising from around $80 a share to a high of $140 (it stands at around $115 a share now). Between the end of 2009 and February 2010, Toyota had to recall nearly 10 million vehicles due to an “unintended acceleration problem”. Yeah…Toyotas around the world were going pedal to the metal without your permission.
It really just depends on what happens next.
The company announced it would set aside $7 billion to help cover the costs of this scandal, but it may not be enough. Other agencies may come hard at VW and try to make an example of them. Volkswagen could be forced to pay that $18 billion fine and then some.
If that happens, then you’ll definitely see Volkswagen struggle in the short-term. An $18 billion dollar payout would wipe out 18 months’ worth of profit. And what happens after? Will others fly by to pick at the Volkswagen carcass? If this is one-and-done type of fine then the Germans could possibly bounce back…but could they do the same if subjected to a relentless barrage of punitive measures?
It will also be useful to monitor sales to see if consumers start to punish Volkswagen for the fraud. Paying fines is one thing, but if the largest automaker by sales starts to see buyers turn away from them, then it could mean the beginning of the end.
On the bright side though, there are entrenched interests that want to see VW emerge out of this thing whole – bloodied but not dead. The company is the jewel of the German automotive industry, and arguable the most important one, as Germany has become the world’s top automobile exporter. Furthermore, VW houses more brands than a cattle rancher with the likes of Audi, Bugatti, Skoda, Lamborghini, Porsche, and Bentley all in its portfolio…so those too would be in jeopardy.
Bottom Line: pay very close attention to what happens next. It might be worth wading into this one and picking up a few shares!
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