Here’s How to Profit From Volkswagen’s “Dieselgate”
The auto industry has reminded investors that it remains relevant as a driver of economic growth, despite the “Dieselgate” emission tampering scandal and a major drop in sales to the tune of 24.7% for Volkswagen AG (ADR) (OTC:VLKAY) in the United States last November. The sales blow translated to a Volkswagen stock price drop from $52.50 per share in May to $29.77 per share.
Standard & Poor’s downgraded Volkswagen’s credit rating from “A-” to “BBB+” with a negative outlook. Nevertheless, the scandal itself, despite the heavy reparations (the scope of which has yet to hit the company) has not hurt sales in VW’s main European markets. In November, new car registrations rose 11.3% in France compared to the same month of 2014, reaching 150,345 units. This means that Volkswagen’s France market saw a 4.4% increase, despite the emission-rigging engine scandal. (Source: “French car registrations up 11.3% in November,” MarketWatch, December 1, 2015.)
This suggests that VW has not lost any of its product appeal and that VW stock will rise again. From January to November 2015, VW sales have grown 5.3%, while the industry, in general, has risen 6.2%. It is enough to suggest that VLKAY stock might soon become a bargain, should it drop to the low $20.00’s again.
Meanwhile, Fiat Chrysler Automobiles NV (NYSE:FCAU) stock jumped 17.1% with the Fiat and Jeep brands selling more than 26% better. Year-to-date, Fiat-Chrysler has gotten progressively better, recording some 13.2% higher sales overall than its competitors, whose average sales increase has been stuck at 3.75% overall. Only BMW, with a growth of 19.1% in the past 11 months, has done better than Fiat. Ford, Toyota, and Nissan have also grown, maintaining a market share of around four percent.
As for Volkswagen, meanwhile, rather than attacking the German group directly, Fiat Chrysler CEO Sergio Marchionne, one of the most influential CEOs of any industry, said that Dieselgate is more than just a German problem. Marchionne has stressed that auto manufacturers have being undergoing much higher scrutiny than ever before and that European automakers must come together to negotiate a new common standard for evaluating compliance, ensuring that standards are the same for everyone.
Fiat Chrysler Growing Fastest in Europe
Meanwhile, Fiat sales have been growing in France and the U.S. In Spain, the company’s growth has been nothing short of spectacular, with brand registrations growing much faster than the market in November and rising 41.9% over the previous year. In comparison, the overall market grew by 25.4%. The Jeep brand saw 81.9% more sales.
In the U.S., the percentage growth was less spectacular but no less significant, as Jeep sales were at their highest level in years. (Source: “Lower gas prices juice Chrysler’s US sales,” The Financial Times, December 1, 2015). Despite that level of growth, in the Iberian Peninsula, GM is the sales leader through its German unit, Opel.
The only developed auto market that did not see major growth in November was Japan, where sales increased 0.3% on an annual basis, not much better than the 0.2% growth in October. The numbers speak for themselves. The automobile industry is at a high but has yet to reach a peak.
Indeed, if there’s one industrial and economic sector that is enjoying solid growth in most of the OECD countries it is the automobile industry. Thanks to such demand for new cars, Volkswagen stock has not only stopped its collapse short, despite the extent of the Dieselgate scandal, but actually reversed the trend, even resonating some bullish vibes. That is not to say that the rest of the global economy has bullish prospects.
Automotive Sector Strong in 2016
While the economic recovery remains doubtful at best, the automotive industry is finally starting to see the fruits of a long structural reorganization that car manufacturers and sales networks have faced since the 2008–2009 financial crisis, which almost signaled the end of several large blocks, GM included.
Apart from a rationalization of the product lines—except maybe for the German brands, which offer a mindboggling array of models and variants—car manufacturers have also worked closer with dealers to refine margins and offer the best possible deals in order to draw dollars from overstretched consumers. (Source: “U.S. November auto sales rise as promotions spur consumers,” The Globe & Mail, December 1, 2015.)
From this point of view, Fiat Chrysler has been very aggressive and it is no coincidence that Fiat stock has risen some 25% in 2015, thanks to the continued success of the “Panda,” again, the best-selling ever, and the “500” family, including the “500L” and “500X,” and making up the company’s best-selling segments in Europe. Fiat has also introduced a full-sized sedan, with all the premium features the brand offers at an unbelievable starting price of $12,500, which is expected to boost Fiat sales at an almost exponential rate in emerging automobile markets.
The strongest comparative auto market has been Europe, but the market there had suffered for years. Now, the dealerships of all manufacturers are drawing in customers, with an overall increase of some 15% year-to-date. The car, not the driverless kind, is becoming a key driver of economic recovery in many European countries.