December 4, 2015    4 minute read

Is now the time to invest in VW?

   December 4, 2015    4 minute read

Is now the time to invest in VW?

Volkswagen; historically the epitome of German efficiency and for years, Volkswagen firmly asserted themselves as Europe’s leading car manufacture, recognized for their reliable and durable vehicles, but after admitting cheating emissions tests, are now facing hefty fines, a massive reduction in sales and a damaging blow to its trusted reputation, however perhaps there is now an inflection point.

In September, a wave of panic hit the equity market and investors quickly scrabbling to flee the situation further exacerbated the situation. Germany’s automotive giant saw a loss of €22.5 billion, a drop of roughly 24% in two days. Fast forward two months and the VW shares potentially present a genuine buying opportunity for savvy investors. Why could now be the ideal time to invest in VW shares? In short – it’s cheap and the shares are already showing signs of a recovery.

The low share price could be attractive to long-term investors, hoping to profit from the VW recovery. Despite the fall, some analysts are bullish on the idea of a VW comeback, such as German private bank Berenberg which allocated a ‘buy’ recommendation to the VW shares. At its peak, VW shares were trading at €255.20 but following the announcement of the ‘diesel dupe’, triggered the share price to plummet and left the price loitering around the €95 mark – a drop of 62.8%. Given Volkswagen’s formidable size, its current share price €131.55 is bargain. This gives the beleaguered company a price-to-earnings ratio of 10.57, a ratio used to evaluate securities in the equity market. Contrast this to the industry average of 15.01, further highlighting the undervaluing of the share price.

Volkswagen have already began to take measures in order to rectify the situation and renew confidence in the company. With a new CEO at the helm implementing new cost-reduction strategies, Volkswagen endeavour to overcome the misconduct by receiving regulatory permission for a series of low-cost fixes to 8.5 million rigged diesel vehicles.

Matthias Muller, Volkswagen’s newly appointed chief executive officer, released these comments:

“My most urgent task is to win back trust for the Volkswagen Group.”

“If we manage to achieve that then the Volkswagen Group with its innovative strength, its strong brands and above all its competent and highly motivated team has the opportunity to emerge from this crisis stronger than before.”

Consequently, the price of the share has been slowly been on the ascent and an upward trend is developing. Despite recent news that US sales have dropped, the German and European demand for VW cars has remained strong, emphasising VW’s dominant stance in the European Market.

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Volkswagen November share price (Source: Google Finance)

VW are not the first (and certainly won’t be the last) company to endure a catastrophic plunge in their share price. Five years ago, BP was held accountable for the ‘worst environmental disaster in the US’ in which approximately 4.9 million barrels of oil spewed from the oil rig for 87 days. Subsequently, BP’s share price more than halved from 651.46p to 315.73p. Although never attaining pre-crisis levels, shares still managed to reach 465.55p by the end of the year. Volkswagen are also showing evidence of a recovery, and as of November 30th, bounced to 131.55 from 95.39 eighteen days earlier.

What must be stressed is the BP incident was not intentional, whereas Volkswagen deliberately deceived customers and regulators. It is yet to be seen how the scandal will affect the company’s earning and whether the company will be able to overcome the damage done to its reputation.

The implications are yet to be known and one thing potential investors avoid is uncertainty. Despite the lack of transparency on the situation, this can be a profitable opportunity for an opportunistic investor and once the dust settles, depending on your appetite for risk, could be a successful investment.

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