VLKAY Stock: Is It Time to Dump Volkswagen AG (ADR)?

VLKAY StockThe Bottom in VLKAY Stock May Finally Be Here

The last time that Volkswagen AG (ADR) (OTC:VLKAY) decided to cut investments was in 2009. Many companies cut their investments that year, as the effects of the subprime banking crisis forced a global recession, but all it took was a little patience and owners of VLKAY stock saw their shares rising steadily from the low of $17.50 in 2010 to its $52.00 peak in 2015. During that time, VW, which enjoyed a brief stint as the world’s largest automaker earlier this year, was adding assets like Ducati motorcycles and Italdesign to its portfolio.

As for now, VW stock has tumbled to the same price level it was at back in November of 2009, burning through six years of gains. Where the financial crisis and recession failed, the emission scandal, dubbed “Dieselgate,” succeeded in bringing down Volkswagen stock, forcing the automaker to cut its annual $12.0-billion investment by at least a billion.

VW’s CEO, Matthias Mueller, admitted that the cut marks a sharp turnaround for a company that has doubled its annual investment, rather than reducing it, since 2008 to today. Mueller said that anything that isn’t essential would either be canceled or postponed, as the company looks for ways to cover the costs related to the emission scandal. (Source: “Volkswagen CEO Matthias Mueller to take on responsibility for personnel on interim basis,” Economic Times, November 20, 2015.)

Volkswagen Has Handled Crisis Well

VW has been forced to eat crow publicly in front of its North American customers and investors ahead of a meeting with industry regulators.

In the past, Volkswagen did not hesitate to show off, using Las Vegas show–style all-conquering presentations to highlight its market strength. However, at the ongoing LA Auto Show, Volkswagen’s presentation reflected the fortunes of its stock in a tone of sobriety and apologetic embarrassment. No light shows, pianists, dancers, or hostesses were to be seen; just some new models, the “Dune Beetle” and “Passat,” from the company that offers 14 brands. The most anticipated news for VW shareholders and customers wasn’t its newest models, but rather it was how the company would make amends; in other words, how much would it fork out in compensation.

For starters, Volkswagen would be offering owners of the affected cars a prepaid $500.00 gift card. (Source: “Volkswagen to offer $1,000 in ‘goodwill package’ to diesel owners,” Autoweek, November 9, 2015.) Meanwhile, VW managers in the United States have been bombarded with questions at a congressional hearing about software capable of distorting the results of emission tests installed on 11 million diesel engines and the falsification of the CO2 emissions from 800,000 other vehicles.

To appease American customers and regulators, to its credit, VW has managed the crisis well, facing it head-on and showing remarkable adeptness at crisis communication. The VW Group has acknowledged its mistakes, apologized, publicly repented, and outlined its solutions. This may seem obvious, but by having addressed the Dieselgate scandal in an (now) honest manner, the company has managed to limit the damage done to Volkswagen stock, showing investors that this is a temporary phase and better days remain ahead.

The Volkswagen USA division, managed by Michael Horn, has been working on several scenarios to fix the emission scandal, working alongside the federal Environmental Protection Agency (EPA) and the California Air Resources Board to address the situation. (Source: “A solution is on the way”, says VW America CEO Michael Horn,” In Auto News, November 19, 2015.)

Admittedly, VW will not suffer as much as the media has been suggesting in the United States. The VW Group has been a relatively small player in the U.S. market compared to Ford, GM, or Toyota, but it does have a loyal customer base, which likely won’t switch to the competition. However, attempts to conquer more motorists in the United States, while not impossible, will take much more time.

The Bottom Line on VLKAY Stock

As predicted, October sales have shown a decline, even as other major manufacturers saw theirs soaring by some 10%, especially Fiat-Chrysler. But such is the power and size of Volkswagen and its growing importance in China, the world’s fastest-growing car market, that sales will surely pick up again in 2016. Indeed, Volkswagen stock will likely return to its pre-Dieselgate levels by this time next year, thanks to the swiftness with which the company’s management has addressed the scandal. In other words, the stock could double from its present levels within 12 months.

Meanwhile, the VW scandal is making other victims in the German industrial establishment. Bosch, which makes spark plugs and fuel injection and engine management systems for a number of manufacturers, among other items, is being investigated by U.S. judicial authorities. They are trying to determine what specific liability the supplier has played in the creation of the VW software to rig emissions calculations. (Source: “U.S. Probes Bosch in VW Emissions Scandal,” Newsweek, November 19, 2015.)

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