Guest essay by Eric Worrall
Volkswagen share prices have risen sharply in the last few days, apparently on the back of news that Volkswagen was already negotiating a settlement with the EPA, over the rigging of Volkswagen CO2 emissions tests, when the scandal broke.
According to CityAM, a prominent London financial paper;
In a testimony due to be presented to a panel of investigators at the House of Representatives today, Horn said the possibility was highlighted to him in a West Virginia University study in spring 2014.
“I was informed that EPA regulations included various penalties for non-compliance with the emissions standards and that the agencies can conduct engineering tests which could include ‘defeat device’ testing or analysis,” he said.
I was also informed that the company engineers would work with the agencies to resolve the issue.
Later in 2014, I was informed that the technical teams had a specific plan for remedies to bring the vehicles into compliance and that they were engaged with specific agencies about the process.”
There have been several positive articles about Volkswagen recently, such as the following article from Forbes;
Feeling Brave? Now Might Be The Time To Buy Volkswagen Shares
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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.”
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Nonetheless Berenberg Bank analyst Adam Hull, in a published research note to investors, said now is the time to buy.
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As Hans Dieter Poetsch indicated, until Volkswagen negotiates a firm settlement, the whole affair could still threaten the existence of the company. Any new release of bad news from EPA regulators could dramatically impact Volkswagen share prices. But a significant number of investors appear to think Volkswagen shares have been oversold, and are betting on a recovery in share value.
There doesn’t seem to be much concern that Volkswagen’s attempt to cheat the emissions test will significantly impact the consumer choices, of people who buy Volkswagens. Perhaps most car buyers are more concerned about look, feel and drivability, than CO2 EPA emissions standards.
Corrected – EW
But what if all diesel cars (not just from the VW group) are caught up in this firestorm, then all car makers that make diesel cars (and that is nearly all car manufacturers) will be affected such that VW will not lose out to its competitors, and as long as the world wants cars there is no reason why VW will not flourish, in particular if it does not lose market share to its competitors and if the stock value is presently depressed due to the scandal, there is a strong case that the stock may be considered cheap and thus a buying opportunity.
It is difficult to see how this will all pan out. Whilst VW has breached the directives and hence may be liable to fines, it may not end up having to pay damages to customers (which could have far worse financial consequences for the company) since those customers may find it difficult to establish damages and a quantifiable loss. Particularly so, if the bulk of other car manufacturers have similarly breached the directives since a customer will be unable to suggest that had he known that VW were cheating he would instead have bought a BMW or Mercedes, or whatever if it is found that those companies have similarly breached the directives. And let’s face it, the bulk of buyers do not buy cars on the basis of emissions, if anything it is because of marque, style, performance, comfort, reliability, cost and financial incentives. Those who are particularly concerned about emissions buy electric or hybrids, not appreciating that such cars are responsible for just as much CO2 as petrol cars; it merely being that the CO2 is emitted at the power station rather than at the end of the exhaust pipe.
The most consistent feature of stock markets is not absolute price reflecting true value, but volatility created by financial professionals to speculate profitably at the expense of the inexperienced investor.
There is nothing surprising about this rise, it is volatility created by the money markets to make money.
Of course VW shares will recover.
With the exception of the “Won’t Someone Pleeze think of the Childrens” usual suspects who probably still believe that margarine is better for you than butter, all sentient organisms have by now realised that this whole load of BS is based on just another load of numbers plucked out of the air by a bunch of overpaid underqualified interfering busybodies in receipt of sacks of brown envelopes and justified by dodgy computer
gamesmodels.Off topic, but there is a headline in the Telegraph today that claims that Lyme disease cases have quadrupled because of climate change.
Oh my God, it seems almost mandatory to blame climate change for everything in order to get published, future funding, promotion, headlines, etc.
I have lived for 70 years in the UK without perceiving any change in the local climate which is perceptible. It may be true, as I am told, a fraction of a degree warmer than the little ice age but I don’t remember that far back.
When we read the article (if we haven’t already screwed it and flushed it down the toilet where it belongs) we see that other, more feasible causes are mentioned: increasing numbers of housing developments in rural areas; immigration from countries in central and eastern Europe where the infection is more common; possible transmission through blood transfusion. But Hey, a journalist won’t get headlines for saying boring things that.
Vomit
Mike, I live in the country here in Canada and our dogs have increasingly come down with ticks in the past 3-4 years. The number of ticks on their ears went from zero 6-7 years ago to 3-4 per year. We’re also seeing more deer around – the likely cause.
Our one dog fell ill and at the vet’s office they confirmed 3 cases of Lyme disease in dogs this year, first time in 20 years according to the aging vet. Our dog ended up having only a bacterial infection and recovered.
If you believe the Earth has warmed during the past 40 years then you would expect Lyme disease in northern climates to increase as deer migrate slowly north. There isn’t much hunting around here anymore as the cities have expanded closer to the rural communities and most of the rural land is monoculture (soybeans and corn). Much of the forested areas is private land not available to the hunters. So the hunters go further north. Perhaps the UK has an increasing deer population as well.
It is also more likely that for the first time doctors in UK are using blood tests that can detect Lyme disease instead of telling the patient in the allowed 10 minutes that they have what is going around at the moment here is a prescription for red and yellow capsules from the pharmacist.
It is possible that the majority of Brits couldn`t give two hoots about the `scandal`, with Jeremy Clarkson and top gear having the moral high ground the little testing people dont stand a chance.
Just wait till they ban all petrol engined lawnmowers due to `emissions`
er..um, the EU is currently going for motorised lawn mower regs for annual test, like a car.
I in Uk don’t give too much of a toss about it but there are plenty extremists that do in UK. What bothers me is many countries outside of the West neither give a toss nor comply. Cats are taken off mostly and likely back street chipping is rife..if you can avoid the bombing etc?
If I owned a lot of shares in VW and the stock tanked, I would be very bullish in the short term. Very, very bullish.
Naturally, no MSM has made the obvious point that the real villain here are the regulators, how,after 30 years, still don’t seem to know how to conduct simple emission testing. Instead of tailpipe testing, they accepted tests by monitoring the engine computer, which was a very stupid strategy..
When auto corporations are forced to comply with unrealistic measures that cannot be achieved without loss of performance or a big upswing in prices – guess what? They have to cheat – to both obey the global masters and also keep their market share.
So why not also cheat to show their share prices are rising…hmmm?
How does a company ‘show’ its share price is rising?
http://www.investopedia.com/articles/fundamental-analysis/financial-statement-manipulation.asp
The share price is what investors are willing to pay for shares in the company, not directly related financial statement manipulation, unless VW issued a financial statement immediately before the recent rise in the share price.
The share price is more likely rising because investors believe it has fallen too low and suspect they can make a profit in the longer term.
Sorry, another off-topic, but this one is a beauty
“Judges plan to outlaw climate change denial”
http://www.telegraph.co.uk/comment/11924776/Judges-plan-to-outlaw-climate-change-denial.html
Now Is an excellent time to purchase VW stock.
Buy low, sell high…. Wow, what a concept.
VW has the world’s largest car distribution and production network, incredible technology, great engineers, the largest production capacity in the market, one of the highest R&D spends in the market, a P/E ratio of just 5.8, a dividend of almost 4%….
VW is a steal at this price. Load up the VW van at these prices. You’ll double your money in 2 years; perhaps less..
Sure, VW made a mistake, but at least their cars weren’t exploding on impact, they were merely cheating on arbitrary emission standards.
In 20 years, we’ll be driving electric cars recharged by electricity generated by thorium reactors, which makes these pollution standards and CAGW moot.
Might be good to wait a couple of quarters. VW might seem too big to fail, but their shares are largely held by municipal entities in Germany…their reaction is hard to predict. The total cost of recalls and civil penalties has been estimated to be around $22b. That’s a lot of cash, and would likely force VW to sell several components to raise money. MAN, SCANIA, Lamborghini, Bentley, etc. could go on the block. I don’t think we have seen the bottom for VW shares…we shall see.
Data– From experience, it’s usually best to wait until a bottom has been reached after a “crisis” to buy.
$25/share was most likely the bottom seeing the jump after it hit $25. It’s impossible to guess tops and bottoms. Let the pigs try to guess those because they’re usually the ones that get slaughtered.
A P/E of under 6 is a rare and fantastic buying opportunity with a company of this quality.
Never look a gift horse in the mouth… A 50% drop means a 100% ROI when the stock just reaches it’s pre-crisis price…
Hey, go for it…I will wait and buy from you when they really hit bottom. 🙂
Data– I hope you get a better price, that would be great, but it’s difficult for a quality company with $5/share profits to trade below $50/share; especially with 4% dividends.
BTW, you won’t be buying my shares, you’ll be buying someone else’s shares trading on emotions rather than with their brain.
Good luck!
Sam…
Just some stuff from The Fool attached below. Loss of trust, loss of brand equity, loss of share and sales, massive fines and sales incentives. Doesn’t sound pretty at all.
I won’t be buying VW any time soon. After an ethical breach of this magnitude, how could anyone trust them? What else might be out there? Corrupt business practices in other markets, maybe?
I don’t think you fully appreciate how important brand integrity is in the auto industry. VW used to be a strong global brand, but not any more, sadly.
You seem to have your strategy, and good luck with it. I am going to watch with interest, but I think I can find better investments, thanks.
http://www.fool.com/investing/general/2015/10/11/why-volkswagen-groups-woes-could-get-even-worse.aspx?source=eptcnnlnk0000002+
Fine them billions. EU tries to do the same to every successful American company. I.e. Intel because they didn’t charge enough to keep AMD profitable. Google because they make to much etc…
This is flat out fraud, time for EU to get a taste of their own medicine. Personally tired of the holier then thou attitude of western Europeans.
US isn’t a great country for free enterprise either.
Apple vs. Samsung? Patented iPhone shape? Complex issues decided by obviously incompetent juries?
Google vs. Oracle? The Supreme Court refuse to even hear the case?
It’s worth remembering that Europeans didn’t want to impose sanctions on Russia, and only did so under enormous pressure from the United States.
http://tapnewswire.com/wp-content/uploads/2015/10/putin-merkel-obama-caricature1.jpg
The sanctions hurt Europeans at least as as much as they hurt Russians.
When General Motors and Merck killed people in the United States with their defective and dangerous products in order to remain “very successful American companies”, the western media didn’t explode with contrived outrage. The discrepancy between the crime and the punishment points to a political motive, having nothing to do with the vehicle emissions or any perceived risks arising from them.
“F*** the E.U.,” said Victoria Nuland during February of 2014.
The E.U. returned the sentiment in full yesterday:
Burning your friends isn’t the best way to keep them.
Can someone please tell me what this so called “scandal” is all about?
I have read 10’s of articles now, and it doesnt add upp.
My conclusion is;
There is no scandal. Just lots of government officials and journalists, who cannot be explained how a computer works.
It seems the most popular journalist version is that the VW computer has “manipulated” the data sendt to EPA?
That doesn’t add up, unless the EPA is so silly that they dont measure the emissions themselves.
The last time I was on a test stand, the test facility put a hose on the exhaust pipe, and measured themselves.
So the journalist version of what the scandal is, surely must be wrong?
I think the scandal is as follows; (But please, correct me if I’m wrong)
-Someone says to the engineers; When the customer press the pedal to the floor, we want horsepowers!
-Someone else says; We want to minimize emissions!
-Someone else says; We want a minimum of fuel consumptions !
And so on.
The engineers realize that many of these demands are contraditory.
So it is best to put the controller software into different “modes”. Like, sporty mode, or, cruise mode, etc.
So the controller is programmed to recognise how the user operates the car. Is he accelerating a lot? Cruising? Relaxed, continous constant speed?
And then from that, optimising the settings to achive what the computer things the user wants at the moment.
Then, at the test-stand, they have a standard test.
I dont know how the test looks like, so I cannot say for sure, but it wouldnt surprise me if they do exactly the same each time, otherwise there would be no repeatability.
The controller recognise the “driving pattern” and selects a mode to optimize emissions; Perhaps it is a constant pedal-usage, cruising.
Next another test-facility is using the pedal a lot, the controller will optmize for horse-power.
And gets a different emission result.
Now, where is the scandal in that?
Then you might say;
So why did the VW bosses resign?
I have no idea. The vague reports in the media on what the scandal is, and VW’s response is …..strange.
Perhaps the VW bosses has some advisors who said:
Listen; There is no way anyone can explain to the government officials, the journalists and the lawyers about how a computer works. Better take the bonus’es and resign.
It was claimed that the car is measuring its speed. Or air pressure. Or steering wheel movements.
There are almost as many stories as journals.
VW admitted to knowingly evading the emissions regulations. Regardless how you feel about the regulations, this is both illegal, unethical, and ultimately unnecessary, since the technology to fully comply is available on their other diesel cars. If the VW executives knew, they should be fired for willful lawbreaking. If the VW executives did not know, they should be fired for incompetence and breach of fiduciary trust. Then sued, or fined, or jailed…or all three.
They announced recalls in China yesterday…this is just the beginning. Whatever emerges from this process will not look much like the VWAG we see today.
It wouldn’t surprise me if my theory is correct.
I that case they have done nothing wrong; They just resign, take the bonus’es and go.
Easier for everyone.
Just like top politicians do.
Instead of explaining to all the officials how a computer works; Will take too long.
Where exactly did “VW admitted to knowingly evading the emissions regulations” ? I am interested.
Try googling “VW admits knowingly evading emissions regulations”. About 10^6 hits. Honestly, I’d be astounded if your theory was right, because you clearly have not done your homework.
You are entitled to your opinion, but not your own facts…
Why are the shares still rising (108 and up !), even now it’s clear 3.000.000 cars need a (possibly costly) technical solution, VW owners may have to be financially compensated and VW possibly faces a15.000.000.000 $ fine ???
Perhaps because a surprisingly large proportion of the population can recognise a blatant stitch-up when it’s thrust under their noses?
It’s not a stitch-up, if I correctly infer your meaning, when the company admits to wrongdoing and the chairman resigns, along with a number of senior executives. Try to wrap your mind around the concept that VW got caught cheating and misrepresenting the performance of their products to the public and the regulators. This isn’t just a matter of perspective…
http://www.volkswagenag.com/content/vwcorp/content/en/investor_relations/share/Shareholder_Structure.html
From the link above, you’ll note that the ownership of VW is mostly institutional and governmental (Qatar!)…only about 10% in the hands of individual investors and mutual funds. Not a groundswell of popular support.
Oh, at least 1 source places the liability in the $80b range.
hopefully we the public shall be told at some point who (makes and models) are over polluting ,I don’t believe other manufacturers used the same software however the coding is quite difficult to read and suspect some form of wrong doing has been the norm for many years with most ,surely the standards are either unrealistic or tests simply silly….The standards have been improving for years, it is not only nox we should be looking at since petrol engines emit a more deadly substance in small numbers ,I expect in few years this is going to be the focus ,until a viable solution exists (no fossil fuel) a steady and realistic program would be far more beneficial than imposing strict false standards:..