Stock Analyst Update

Volkswagen not in the Clear Yet

Richard Hilgert

No-moat-rated  Volkswagen (VLKAF) was fined EUR 1.0 billion by a German public prosecutor, including a maximum penalty of EUR 5 million and EUR 995 million disgorgement of economic benefits. The company’s press release referred to the prosecutor issuing an "administrative order" against the company for a breach of "monitoring duties" of the Powertrain Development department in the "context of vehicle tests" (the diesel crisis), resulting in the fine. Because of the nature of the fine, EU regulations precludes any other EU country from fining the company for the same breach of monitoring duties.

However, other matters could still be litigated, including stock market manipulation by a lack of timely public notification of the diesel issue, noncompliance of diesel emission regulations, and consumer agencies seeking relief similar to remuneration received by U.S. consumers who had the option to have Volkswagen buy back the vehicle or receive $5,100 cash plus free repair. The fine is also unrelated to the current ongoing investigation regarding diesel equipment collusion among all three German automakers.

We have maintained our EUR 230 fair value estimate as the EUR 1.0 billion fine had less than a 1% impact. Our fair value estimate continues to include a EUR 20 billion reduction to our enterprise value due to the remaining potential European litigation. In addition, we assume margin contraction relative to Volkswagen's 10-year historical performance to reflect higher spending for industry disruptive technologies including mobility services, autonomy, and electrification. We contract margin through our entire five-year forecast from 7.2% in 2018 (versus 8.7% in 2017) to a normalized sustainable midcycle of 5.1%. Our midcycle assumption represents a 170-basis point reduction from the 10-year median. Even so, the 4-star-rated shares of Volkswagen trade a compelling 29% discount to our EUR 230 fair value estimate.

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Richard Hilgert does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.