The company just reported an operating loss of $3.84 billion in this year’s third quarter, stemming from their scandal over falsifying their diesel emissions. This will be their first quarterly loss in fifteen years – yes, even counting the recession.
Volkswagen is anticipating hefty payouts over their deceptive data, which could potentially involve the recall of 11 million cars. Yet, sales revenues in the first nine months of this year were up 8.5%. Plus, the carmaker has had discussions with European Union state authorities to limit legal action beyond what has already been agreed with Germany’s Federal Motor Transport Authority. Since the scandal, Volkswagen has promised to step up cost-cutting efforts. Additionally, the company has a pretty nice cash reserve, which jumped 29% after selling a large stake in Suzuki. This is all good news!
What about winning back consumer trust? A company can’t survive with no customers.
I still want to give time for the dust to settle, but it’s pretty difficult for a company to regain a customer’s trust once it has been lost. Volkswagen will have this black mark for quite some time, and will have to do some repositioning and heavy lifting to gain confidence. This means that they’ll have to keep throwing money at the problem… and they don’t know how much money it will take. It’s possible that the $7.4 billion set aside to cover costs of the emissions scandal is just the tip of the iceberg.
In their quarterly report, Volkswagen said, “It is currently impossible to assess the legal risks connected with the diesel issue due to the early stage of the comprehensive and exhaustive investigations. As a consequence, corresponding provisions have not been recognized in the interim financial statements.”
VW has appointed a new CEO, Matthias Mueller, who said that the cost of the scandal would be “enormous, but manageable”. He also said that going forward, the company would focus more on profitability than sales volume. The company is also expecting to speed up development of electric and hybrid vehicles. This could play a major role in regaining consumer trust.
But is the stock a good buy?
Let’s run through some things: VW has high net liquidity, they appear to be controlling the provisions of the scandal, their sales have been increasing, the P/E ratio is a low, low 5 (at the time of writing) and the new CEO says they will do “everything in our power to win back the trust we have lost.”
Car companies have been rocked with scandals before. Okay, maybe not of this magnitude, but still, they survived! I don’t think that people will stop buying Volkswagens because of this scandal and I believe they can actually increase their sales and market share. The price is low compared to earnings, and their dividend is a juicy 4.48%. If they didn’t have the cash to survive the scandal, I wouldn’t touch the stock. But since they do, I’m chalking up VW as a solid buy.