“What’s up doc?”, as Bugs Bunny might say. Well, certainly not the share price of Volkswagen AG (Xetra:VOW.DE). It’s fallen 32% over the past couple of days of trading. It turns out the makers of the Beetle, immortalised in the 1960s comedy film The Love Bug (and sequels), do more than make economical cars. They’ve been economical with the truth as well. Specifically they’ve been fiddling emissions tests in the USA. It’s a timely reminder that all investors must be diversified at all times.
Volkswagen is, or rather was, one of the bluest of the blue chips. It’s a German industrial giant that manufactures and sells its wares throughout the world.
The maker of the people’s car – for that’s what “Volkswagen” means – manufactures vehicles under an impressive array of brands.These range right from the cheaper end (Skoda, SEAT), through the middle market (Volkswagen), by way of the premium end (Audi), into high end sports cars (Porsche, Bugatti, Lamborghini) and top end luxury limousines (Bentley). Volkswagen also owns the Ducatti motorcycle business and makes trucks under the Scania and MAN names.
People expect that kind of company to be the very model of probity and good business practice. But it turns out even the very best companies can be prey to rogue management practices from time to time. It’s part of the human condition. People misbehave.
It turns out that diesel cars sold in the USA since 2009 were set up to rig government emissions tests. According to the Telegraph some kind of software was installed that “works by sensing when a car is being tested and injecting urea into the exhaust system to cleanse emissions. It allows cars to appear ultra clean when in fact they emit up to 40 times the legal limit of nitrogen dioxides”.
Wow. I’ve heard of people using someone else’s unadulterated urine to pass alcohol tests to avoid a driving ban. But this is surely the first time that a car maker has been exposed for using urine extract to keep their cars on the road. VW’s management have literally been taking the p***.
And presumably for this to have happened there must have been collusion between management, the engineering and technology departments. This is a massive scandal affecting tens of thousands of cars.
The teutonic management team has turned out to be staffed by the cartoon characters from Looney Tunes. Daffy Duck in the engineering department has been designing the diesels. Bugs Bunny from technology has been putting bugs into the software. Porky Pig in management has been telling porkies. (A note for those not familiar with cockney rhyming slang: “lie” is “pork pie”, or “porkie” for short.)
Fines in the US alone are expected to run to around $18 billion, on early estimates. Then there will be the lawsuits from owners and environmental groups, which presumably could have penalties running to billions more. Plus huge numbers of cars will have to be recalled and tested – also costing a fortune.
Lawmakers tend to have little patience with corporate lawbreakers, especially when the offence is apparently so blatant and the powerful environmental lobby is on the case.
What’s not yet known is whether this test rigging was also going on in Europe and other markets. But you can be sure that the authorities are on the case. Lawmakers tend to have little patience with corporate lawbreakers, especially when the offence is apparently so blatant and the powerful environmental lobby is on the case.
It’s also unknown whether other vehicle manufacturers have been playing the same dirty tricks. If so then other dominoes will fall.
Yesterday I met up with some people in London who run a big financial publishing business in Britain. They said that their readers had already been in contact to ask whether they should buy VW shares after the big price falls, in the hope of a bounce.
My instant reaction was no. It’s far too early to know the extent of the financial and reputational damage. Steer well clear until the dust has settled.
After all we’ve seen these kinds of blue chip meltdowns before. VW makes the a lot of the cars but BP plc (LON:BP) makes a lot of the fuel. But in April 2010 the share price fell by 45% after the massive Deepwater Horizon oil spill in the Gulf of Mexico.
Okay, that wasn’t a deliberate fraud. But BP was accused of skimping on safety measures. The fines, penalties and cleanup costs ran to a staggering $44 billion or so, according to the Wall Street Journal. BP’s share price is still down 35%, over five years later (admittedly not helped by the sharp fall in the oil price more recently).
Before that it’s said that BP was one of the biggest payers of dividends to British pension funds, which valued it for its excellent management recommendation. It was truly blue chip, just like Volkswagen.
Also many big banks have paid tens of billions of dollars – perhaps collectively even hundreds of billions – in US fines in recent years as more and more regulatory breaches have been uncovered.
The USA really, really isn’t the place for a company to screw up if it wants to stay profitable. There’s no more litigious country in the world. And foreign companies are even more likely to suffer blows from the heavy hand of the law.
OfWealth mentioned Volkswagen shares as a potential opportunity in Europe back in October last year. At the time they looked like a real bargain, with a P/E of just 8, a price-to-book value of 0.8, and a dividend yield of 2.6%.
Initially it appeared that our timing had been excellent. Between 14th October 2014, when we highlighted the opportunity, and 17th March 2015 the share price rose from 155.30 euros to 247.50 euros. That’s a gain of 59% in just five months. It was the perfect demonstration of the power of value investing – the strategy of buying things when they look cheap which we advocate here.
But of course we don’t have a crystal ball. We never expected a German national industrial champion to be involved in such shenanigans as systematically faking emissions tests.
At the time of writing the share price is down to 114 euros, or 54% below the March peak. Compared with the price when we wrote about VW it’s now down 26%. More falls are possible as the scandal unfolds. Or there could be a bounce back. It’s simply too early to tell.
All of this just goes to show that when it comes to investing – whether in shares or in anything else – you never know what going to happen next. Sometimes the surprises are good ones, sending prices rocketing. But from time to time certain investments are hit by big shocks that drive prices down.
This is why we always stress the need to diversify your investments. It’s one of the five things every investor must do. After all, just like the driver of a car, you never know what’s around the corner. That’s all folks!
Stay tuned OfWealthers,