Volkswagen Crisis a Gusher That Can't be Capped

It's still too soon for investors to estimate the cost of the emissions scandal
Updated on
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Not for the first time, the Volkswagen emissions scandal bears comparison with BP's Gulf of Mexico crisis in 2010, when the world watched with grim fascination as the company tried to stop oil gushing from its Macondo well.

For VW investors, the question is when will the carmaker manage to cap its own stream of liabilities. Before Tuesday's latest admission that it has now found faulty carbon-dioxide readings affecting 800,000 vehicles -- including for the first time some with gasoline engines -- there had been murmurings that the market's punishment of the world's second-biggest auto-maker had been too severe.

The preference shares have tumbled 37 percent since U.S. regulators first accused the company of fiddling emissions tests in September, erasing 23.5 billion euros ($26 billion) from its market value. Volkswagen's enterprise value is now just 1.1 times a weighted average of earnings before interest, taxation, depreciation and amortization over the 2015 and 2016 financial years, according to data compiled by Bloomberg. By comparison, BMW's is 7.3 times.

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Yet Tuesday's announcement -- alongside worries that the scandal could spread to the company's Porsche unit -- shows that discount is fully justified. Yes, the company is awash with cash to help with recall costs, regulatory fines and litigation. It had 27.8 billion euros of net cash at the end of September.

But even that pile of money will be stretched if costs keep escalating. The company said on Tuesday that it will add another 2 billion euros to the 6.7 billion euros it had previously set aside to fund the initial recall of 11 million vehicles.

Beyond that, assessing legal costs or potential damage to the brand is more of a guessing game, with analysts putting the total liabilities at anything from 13 billion euros to a barely credible 78 billion euros. (VW's market value is only 53 billion euros)

The latest stink around carbon dioxide readings makes the situation even more difficult to read. So far it affects 800,000 vehicles, but that could increase. The fact it will cost VW about 2,500 euros to fix each of those cars, compared with 609 euros for the vehicles getting the earlier emissions software fix, shows any big increase will be expensive.

So anyone looking to use the crisis as an opportunity to buy into an undervalued giant may want to hold off until the full set of horrors is revealed. It was more than a year after the spill before BP shares saw a sustained recovery.

(Corrects BP share decline in last sentence.)
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