VLKAY - Volkswagen

[DCG]

VW generates something like $13-$14B in operating profit

 

 

Currently.

 

 

The question we don't know the answer to is how much this will tarnish their brand and hurt sales.

 

 

VW is a strong brand, so I do think they will be able to rebound.

[RadMan24]

Audi is basically VW. Porsche is a gold mine, they sell that pick it up. Also, VW sales could drop off big time unlike GM, which was unaffected because recalled models were old and expired brands. I just think this issue deep, its not going to be cheap based on quanitative numbers. Way too many qualitative factors one must shift through

[Phaceliacapital]

Of course he knew... we're talking about 11 million cars...

 

And if he really didn't know, he should have been fired anyway.

 

Same goes for the directors on the board..

[Hielko]

Of course he knew... we're talking about 11 million cars...

 

And if he really didn't know, he should have been fired anyway.

 

Same goes for the directors on the board..

I agree with you that he should have known, but I think it is pretty plausible that he didn't.

 

A big organisation with a super complex product; easy to see how not everything is transferred up in the chain of command because most issues shouldn't require the attention of the ceo. And this is almost certainly something that was figured out by some engineer in the software department, not some strategic decision made at the C-level. Of course, that engineer, or his supervisor or the supervisor of the supervisor should have transferred this "invention" up in the chain of command, but it probably got stuck somewhere for some reason. Not necessarily a good reason, but some reason nonetheless and not everybody might understand how big of a decision it is to cheat with those tests. Or perhaps in the relevant division trying to game the tests might have been seen as legitimate moves. You start with doing tests with different tires or something like that and it could evolve in this with no-one thinking that they made any decision that needed approval from a higher level.

 

How can you as a ceo protect your company from this? You don't know that it is happening. You might not even know that it can be done. So you could say it is some sort of unknown risk/black swan type event.

 

On the other hand, perhaps we find in the next couple of days/months/years that the CEO knew about it and explicitly approved it. Who knows. All speculation at this point in time.

[Liberty]

The CEO denying he knew would be more plausible if he wasn't known as a control freak deeply involved in all kinds of tiny details for his products:

 

http://www.bloomberg.com/news/articles/2015-09-22/volkswagen-ceo-s-history-of-sweating-the-details-now-haunts-him

[Morgan]

 

Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

Though I do agree with your other arguments. :)

 

Things that I would check before buy:

1. Are there any debt covenants that prevent spin off of the other brands?

2. What would happen to Audi's earnings if the economy of scale of VW is cut down?

 

Yessir, I read "Reminiscences of a Stock Operator". Quite a good book. I guess I worded it incorrectly; "worth" isn't the right word. Something better like, "the market valued VW at $120bn and now it's $60bn" with a disclaimer that I don't think it's cheap because the market now values it at a lower dollar amount, but rather I could buy the whole business for a (probably, depending how bad this gets) cheap price relative to what is earns.

 

Basically I think the all the top executives will be fired/resign, the new management will do a "bloodbath" on the company and it'll be less profitable or unprofitable for a time, but the profits will come back and the VW brand will be resuscitated. I expect this will take 3-5 years. If I were an acquirer, I'd plan on owning it forever basically and the first 3-5 years of bad to mediocre performance would be assumed. This sort of reminds me of the BP spill and the Exxon Valdez spill. Both companies took big hits financially and reputationally, but both survived, restored their reputations and are profitable.

 

 

PS - Congrats muscleman on passing your series 65!

[ZenaidaMacroura]

 

Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

Though I do agree with your other arguments. :)

 

Things that I would check before buy:

1. Are there any debt covenants that prevent spin off of the other brands?

2. What would happen to Audi's earnings if the economy of scale of VW is cut down?

 

Yessir, I read "Reminiscences of a Stock Operator". Quite a good book. I guess I worded it incorrectly; "worth" isn't the right word. Something better like, "the market valued VW at $120bn and now it's $60bn" with a disclaimer that I don't think it's cheap because the market now values it at a lower dollar amount, but rather I could buy the whole business for a (probably, depending how bad this gets) cheap price relative to what is earns.

 

Basically I think the all the top executives will be fired/resign, the new management will do a "bloodbath" on the company and it'll be less profitable or unprofitable for a time, but the profits will come back and the VW brand will be resuscitated. I expect this will take 3-5 years. If I were an acquirer, I'd plan on owning it forever basically and the first 3-5 years of bad to mediocre performance would be assumed. This sort of reminds me of the BP spill and the Exxon Valdez spill. Both companies took big hits financially and reputationally, but both survived, restored their reputations and are profitable.

 

 

PS - Congrats muscleman on passing your series 65!

Before the oil slump a year or so back I read that if you took the trough price as a starting point during the Macondo incident, BP underperformed Exxon over the same period of time.  I don't know if that indicates some long run (maybe compliance related) impairment of BP or if it was just a fluke.  Similarly, I think it is not entirely implausible that another of the global auto manufacturers will outperform Volkswagen even if someone managed to bottom tick it.

[ZenaidaMacroura]

http://i.imgur.com/TMn1AI5.jpg

It appears to not be just a transient phenomenon uncovered by the latest price slump - it has persisted since before oil was under $70.

 

I don't really have a particular point, just that it's interesting and that bottom ticking these turnarounds isn't necessarily the best way to play it especially if the other autos are sympathetically selling off too. 

[muscleman]

 

Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

Though I do agree with your other arguments. :)

 

Things that I would check before buy:

1. Are there any debt covenants that prevent spin off of the other brands?

2. What would happen to Audi's earnings if the economy of scale of VW is cut down?

 

Yessir, I read "Reminiscences of a Stock Operator". Quite a good book. I guess I worded it incorrectly; "worth" isn't the right word. Something better like, "the market valued VW at $120bn and now it's $60bn" with a disclaimer that I don't think it's cheap because the market now values it at a lower dollar amount, but rather I could buy the whole business for a (probably, depending how bad this gets) cheap price relative to what is earns.

 

Basically I think the all the top executives will be fired/resign, the new management will do a "bloodbath" on the company and it'll be less profitable or unprofitable for a time, but the profits will come back and the VW brand will be resuscitated. I expect this will take 3-5 years. If I were an acquirer, I'd plan on owning it forever basically and the first 3-5 years of bad to mediocre performance would be assumed. This sort of reminds me of the BP spill and the Exxon Valdez spill. Both companies took big hits financially and reputationally, but both survived, restored their reputations and are profitable.

 

 

PS - Congrats muscleman on passing your series 65!

 

Thank you Morgan!

Yes. The current situation is getting interesting. However, buying Porsche might make more sense? It is both cheaper and has less impact on this scandal.

[John Hjorth]

More from an European angle :

 

Translated from Danish : The real VW scandal is European: Our roads are filled with heavily polluting diesel cars.

 

http://ing.dk/artikel/den-virkelige-vw-skandale-er-europaeisk-vores-veje-er-fyldt-med-staerkt-forurenende

 

[You can read it in English using the translation feature in Chrome]

 

 

 

[hyten1]

chevy cruze vs vw

 

http://www.thetruthaboutcars.com/2015/09/tech-dive-chevy-cruze-stays-clean/

 

[muscleman]

chevy cruze vs vw

 

http://www.thetruthaboutcars.com/2015/09/tech-dive-chevy-cruze-stays-clean/

 

Interesting....

I wonder if the author of this article has actually tested the Cruze 2.0L or he was just guessing that the Cruze is clean.

 

[Mephistopheles]

http://i.imgur.com/TMn1AI5.jpg

It appears to not be just a transient phenomenon uncovered by the latest price slump - it has persisted since before oil was under $70.

 

I don't really have a particular point, just that it's interesting and that bottom ticking these turnarounds isn't necessarily the best way to play it especially if the other autos are sympathetically selling off too. 

 

The chart you posted doesn't show the absolute bottom, which came on 06/21/10. From then until now, it is true that XOM has still done better, by being up 22% vs. 11% for BP.

 

But this isn't the proper way to look at it imo. BP has a much higher dividend rate, so we shouldn't exclude that number. Also, within 6 months, by 01/10/11, BP had nearly doubled to $49. This was only $8 off the pre-oil spill price. For those who bought because of the overselling, $49 was a very healthy price to sell at, because imo the oil spill deserved more than an $8 discount to the previous price. Over the long term, these incidences are less and less significant to the stock returns. So it makes sense that for the better business - XOM in this case - to outperform over the longer term. But this doesn't mean that BP wasn't significantly undervalued at that point in time.

 

I was one of the fools who bought BP, saw it double, and continued to hold for like another year. At the end my ROI wasn't as great as it should have been.

[ZenaidaMacroura]

 

 

But this isn't the proper way to look at it imo. BP has a much higher dividend rate, so we shouldn't exclude that number. Also, within 6 months, by 01/10/11, BP had nearly doubled to $49. This was only $8 off the pre-oil spill price. For those who bought because of the overselling, $49 was a very healthy price to sell at, because imo the oil spill deserved more than an $8 discount to the previous price. Over the long term, these incidences are less and less significant to the stock returns. So it makes sense that for the better business - XOM in this case - to outperform over the longer term. But this doesn't mean that BP wasn't significantly undervalued at that point in time.

 

I was one of the fools who bought BP, saw it double, and continued to hold for like another year. At the end my ROI wasn't as great as it should have been.

I agree if one is good at timing these sorts of things.  I think for myself atleast it would be difficult to assume that I caught both the bottom and then was prescient enough to sell at the recovery price top.  I guess it's mostly just illustrative that finding a good price entry pales next to just finding a better business. 

 

If what you say is true and $49 was too high post Deepwater Horizon though then your return calc would have to assume you sell to a greater fool?  I mean volkswagen has some epic short squeeze history so you might well get to sell for more than its worth...

[Mephistopheles]

 

 

But this isn't the proper way to look at it imo. BP has a much higher dividend rate, so we shouldn't exclude that number. Also, within 6 months, by 01/10/11, BP had nearly doubled to $49. This was only $8 off the pre-oil spill price. For those who bought because of the overselling, $49 was a very healthy price to sell at, because imo the oil spill deserved more than an $8 discount to the previous price. Over the long term, these incidences are less and less significant to the stock returns. So it makes sense that for the better business - XOM in this case - to outperform over the longer term. But this doesn't mean that BP wasn't significantly undervalued at that point in time.

 

I was one of the fools who bought BP, saw it double, and continued to hold for like another year. At the end my ROI wasn't as great as it should have been.

I agree if one is good at timing these sorts of things.  I think for myself atleast it would be difficult to assume that I caught both the bottom and then was prescient enough to sell at the recovery price top.  I guess it's mostly just illustrative that finding a good price entry pales next to just finding a better business. 

 

If what you say is true and $49 was too high post Deepwater Horizon though then your return calc would have to assume you sell to a greater fool?  I mean volkswagen has some epic short squeeze history so you might well get to sell for more than its worth...

 

Well, I don't think it was about timing. For example, let's say at bottom tick BP was at 60% IV, and XOM was at 75% IV. I was just hoping for a repricing to IV. Of course, over the long term better businesses grow IV faster, and that's why XOM has fared better - and the further along we go in time, the greater the proportion IV growth is a factor in your investment return vs. repricing due to a negative event. This is why Munger says that in the long term your returns equal ROE on a stock, regardless of purchase price.

 

Btw I haven't bought VLKAY, just observing for now.

[Haasje]

I really do not like the "opportunity" of buying VW at the scandal induced low.

 

The Deepwater Horizon comparison is interesting in that it is a perfect type of event to capitalize on but also completely different. The big difference to me is that events like Deepwater Horizon / Fukushima / Hurricane are type of independent events. The fact that they just occurred does not increase the frequency with which they will occur.

 

The VW incident is the exact opposite. The event happened by design. It is an active evil act by insiders of the corporation. That makes the road to recovery in the publics eye much harder. Will make regulators less forgiving and it is not an independent event. This is much more akin to accounting fraud. A Dutch firm called Imtech (total market darling) got obliterated twice over after human fraud (at the German subsidiary no less) and there was no end to the torrent of wrongdoings and fraud untill the equity got obliterated twice.

 

Anyway, the reason I think its very different from a FUkushima or Deep Horizon type of event is that it is not necessarily independent.

 

 

 

[Picasso]

I think the share price declines correlates to the number of uncertainties, differences from previous events, impact on consumers, among other things.  It's too easy to bring up BP or Olympus or Salad Oil, or whatever.  At best you're trying to fit square pegs into round holes.

 

When someone invested in BP, what could you really point to as a roadmap?  Everything else wasn't even close enough to get a good gauge of the risk. 

 

I thought Olympus was a good one because they had a good business that was not that impaired with a lot of uncertainty around the losses.  Their customers weren't worried about accounting issues and so the tough medicine could eventually be swallowed and you'd have a healthier patient.  Is that the case with VW?  We really don't know yet but that is why the share price has been hit so hard.

 

You have to look at the long-term earnings potential of these businesses and figure out how impaired they are.  I think in the case of VW, the uncertainties were/are high enough to erase enough market cap to fit a GM and FIAT inside it. 

 

I've been looking at some perpetual VW bonds but the prices bounced more strongly than I wanted to see and hedging out the Euro is a pain for me.  Without the currency aspect of this I'd have felt more comfortable buying perpetual floaters at 6% yields compared to Bunds at 1.3%.  I'm not sold on the equity either, but it wouldn't surprise me to see 50% moves in either direction. 

 

One last thing to mention is the contrarian psychology here.  I feel like a lot of amateur value investors/contrarians who didn't catch BP (or whatever blow up stock) are looking at this as a no brainer.  That worries me a bit which is why I've been eyeing the debt more than anything else.

[ni-co]

I had a quick look at VW and BMW because opportunities like this present themselves rarely. I have to say that I am not impressed by their numbers. They produce huge EBITDA figures but close to zero FCF when you take the average of the past five years. What makes you guys think VW is cheap?

[one-foot-hurdles]

A good summary analysis on the VW scandal

https://foragerfunds.com/bristlemouth/volkswagon-scandal-intelligent-speculation/

[intothebreach]

I made a decent profit buying into BP following the Macondo incident. But in that case, at least we knew that there was one incident, as opposed to the possibility that a number of wells could suddenly start showing the same problem.

 

With Volks, the questions that make it impossible for me to handicap are:

1. Does this affect all diesel cars made by the group, or is it limited to specific geographies (such as the US)

2. How far back was this practice started?

3. Has any cheating been done with non-diesel cars?

 

If the answers to these questions are the worst ones (worldwide, long-time and yes), it is not impossible for Volks to go bankrupt, no matter how financially solid it appears to be today. Interesting nonetheless and as more info is known, it may develop in an investment opportunity but for the time being, I find the risk simply impossible to evaluate.

[goldengatepartnership]

 

Six months ago the company was worth $120b, now it's at $60b and will probably go a little lower still. The coming weeks and months will be really interesting.

 

Have you ever read the book "Reminiscences of a stock operator"? The author said if he wants to bump and dump a stock he would push it through the roof and then keep selling all of his inventory. On all the way down, people will say, it was $50 last month and now it is only $35. Must be a good deal, and I will buy. This is just common psychology. But in fact the stock could be worthless.

 

I think it is a warning sign to be interested in the stock if you are arguing "the company was worth $120b, now it's at $60b".

Though I do agree with your other arguments. :)

 

Things that I would check before buy:

1. Are there any debt covenants that prevent spin off of the other brands?

2. What would happen to Audi's earnings if the economy of scale of VW is cut down?

 

Yessir, I read "Reminiscences of a Stock Operator". Quite a good book. I guess I worded it incorrectly; "worth" isn't the right word. Something better like, "the market valued VW at $120bn and now it's $60bn" with a disclaimer that I don't think it's cheap because the market now values it at a lower dollar amount, but rather I could buy the whole business for a (probably, depending how bad this gets) cheap price relative to what is earns.

 

Basically I think the all the top executives will be fired/resign, the new management will do a "bloodbath" on the company and it'll be less profitable or unprofitable for a time, but the profits will come back and the VW brand will be resuscitated. I expect this will take 3-5 years. If I were an acquirer, I'd plan on owning it forever basically and the first 3-5 years of bad to mediocre performance would be assumed. This sort of reminds me of the BP spill and the Exxon Valdez spill. Both companies took big hits financially and reputationally, but both survived, restored their reputations and are profitable.

 

 

PS - Congrats muscleman on passing your series 65!

 

Thank you Morgan!

Yes. The current situation is getting interesting. However, buying Porsche might make more sense? It is both cheaper and has less impact on this scandal.

 

Just on this point, Porsche has actually been rendered to a pure holding company with no operating assets on its book and no revenues (earnings from associates). It has thus been fluctuating almost in line with VW since >90% of its assets are equity holdings in VW

[fareastwarriors]

http://www.bloomberg.com/news/articles/2015-11-03/volkswagen-emissions-woes-deepen-as-800-000-more-cars-affected

[DCG]

ANyone buying VLKAY? It sounds like people are still buying their cars.

[fareastwarriors]

VW's European Market Share Slips as Diesel Scandal Hits Demand

 

http://www.bloomberg.com/news/articles/2015-11-17/volkswagen-europe-market-share-shrinks-in-first-month-of-scandal

[feynmanresearch]

ANyone buying VLKAY? It sounds like people are still buying their cars.

I bought immediately after the scandal was released, rode it all the way to $29 and change and slowly diminished my position.

 

Bought a bit more last week