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Maher Syed

The End of Volkswagen (VLKAY)? Emissions Scandal in a Nutshell

VLKAY

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Volkswagen (VLKAY - Free Report) shares opened up 5% lower today as investors continue to sell off shares amidst speculation on what penalties the company will face for cheating on emissions tests worldwide.  By now, most investors are aware of the fact that Volkswagen cheated on emission tests in many of its vehicles issued since 2008.  These diesel vehicles have software which manipulates results when they are tested for emissions.  As it turns out, many Volkswagen vehicles would actually release 10 to 40 times the legal amount of emissions allowed on the road in the US.
 
The repercussion from the scandal could damage the company’s stock much more than the 34% chunk that’s already been taken out of its market cap.  Volkswagen has set aside $7.3 billion to deal with penalties which will arise as a result of the scandal.  Will $7.3 billion be enough though?  The U.S. Environmental Protection Agency (EPA) says that the penalty for Volkswagen could amount to as much as $18 billion.
 
Volkswagen is caught up in what has become a moral crisis.  To quell investor fears and wavering confidence, the company’s former CEO Martin Winterkorn has resigned.  He claims no personal responsibility for the emissions cheating, but has apologized on the company’s behalf for the scandal.  The new CEO of Volkswagen was announced today.  Now, Matthias Mueller will be at the helm as the new CEO of Volkswagen.  Matthias was previously the brand chief of Volkswagen’s Porsche unit.
 
The new CEO is attempting to make a more decentralized corporate structure for the company, so as to help make sure that a scandal like this never happens again.  Although it is a little reassuring to see a bit of a change-up in the company’s widely criticized corporate structure, there’s no beating around the gigantic elephant in the room.
 
Volkswagen has reported that there are 11 million vehicles around the globe with emissions cheating software.  There are close to half a million faulty Volkswagen vehicles in the US, and the gigantic threat of $18 billion dollars in penalties revolves around those vehicles.  This is just the possible penalty in the US though.  There are still 10.5 million vehicles across the globe with possible fines to assign.
 
Germany’s transport minister has recently announced that there are 2.8 million vehicles which have manipulative emissions software in Germany.  In the US, the EPA can fine up to $37,500 per faulty Volkswagen vehicle.  If the largest economy in the EU is even one tenth as harsh as the toughest penalties in the US, this will amount to about $10.5 billion in fines from Germany alone.
 
It is scary to think of what could happen to this company.  It was the second largest automotive company by market cap just before the 18th of September.  Now, there’s no real telling when or if the company will ever recover its market cap at this point.  Steer clear from this stock for now, as it doesn’t have a favorable Zacks Rank. 
 
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