Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Volkswagen Now a Classic Value Investment?

One of the classic descriptions of a value investment is an otherwise good company that is having some sort of high-profile problem that is driving the share price down. Obviously, a lot of people are wondering if Volkswagen (OTC: VLKAF) now fits that description because of the diesel exhaust scandal.
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Intriguingly, this might actually be the case because when one takes a look at its financial numbers, Volkswagen still looks like a really good company. It has many of the attributes of a classic value investment and a share price that is in free fall.

Volkswagen offered investors a host of really appealing numbers on June 30, 2015:

  • A TTM revenue of $254.7 billion
  • A diluted EPS of 25.94
  • A net income of $13.01 billion
  • A profit margin of 4.47%
  • A dividend yield of 4.59%
  • A free cash flow of $468.88 million
  • $36.28 billion in cash and short-term investments
  • $18.31 billion in cash from operations

Volkswagen is also very undervalued at the moment; it had a market cap of $55.68 billion and an enterprise value of $146.17 billion. It looks as if Volkswagen is still a really good company suffering from a problem.

The Scandal Will Not Hurt VW as Much as You Think

The bottom line is that Volkswagen is still a really good company despite the scandal. It still makes great cars, and it has a tremendous brand name and incredible customer loyalty as well as some fantastic technical capabilities.

The Audi Etron concept electric SUV meets the press in Frankfurt.
The Audi Etron concept electric SUV meets the press in Frankfurt.

In the past few weeks two VW subsidiaries, Porsche and Audi, unveiled electric cars with a performance similar to those of Tesla Motors (NASDAQ: TSLA) and a greater range. Volkswagen is also the world’s number one automaker, having wrested that spot away from Toyota.

Even the diesel scandal might not hurt that much. Analysts estimated that it would cost Volkswagen around $6.5 billion to fix all the cars with the illegal software, Reuters reported. Yes, that’s a lot of money, but VW is a company that has $36.28 billion in the bank. It could easily absorb that loss without affecting its bottom line. In fact, Volkswagen would still have around $29 billion in the bank or cash and short-term investments after paying for the fix.

The Opportunity the Scandal Presents for Volkswagen

The diesel losses will not be as catastrophic as the media is making them out to be. Instead, Volkswagen has the resources to survive this debacle and to embark upon further expansion and electric car development.

Audi unveiled an electric version of its Quattro SUV at the Frankfurt Motor Show on September 14, 2015, that has a range of around 310 miles on a charge of juice, which is more than Tesla Motors’ (NASDAQ: TSLA) vaunted Model S, Forbes reported. It also has an acceleration rate of 0 to 60 miles per hour in 4.5 seconds.

The Mission E at the Frankfurt Auto Show
The Mission E at the Frankfurt Auto Show

Not to be outdone, Porsche has unveiled an electric version of its 911 called the Mission E, CNN reported. The Mission E has a range of around 310 miles a charge, and it takes just 15 minutes to charge its battery to an 80% capacity.

Volkswagen’s electric car capabilities now rival those of Tesla, and unlike it Tesla, it has the manufacturing capacity to put these vehicles into production fast if need be. If the diesel scandal increases the demand for electric cars, Volkswagen is already is a good position to meet the demand. Unlike Tesla, it has a dealer network already in place.

Putting one of these electrics into production now and rushing it into dealers would also be a shrewd public relations move for Volkswagen. That would make the eco-geeks and regulators very happy. Quickly putting electric versions of popular Volkswagen models like the Jetta, Tiguan and Beetle into dealerships would be a great way to undo some of the damage the scandal has done to Tesla’s reputation.

‘Mad Money’ Host Jim Cramer Does The ‘Harlem Shake’ – Very interesting read

Interestingly enough, Tesla itself could profit from this situation because production of VW electrics would increase the market for lithium ion batteries from its massive Gigafactory in Nevada. It could also give Elon Musk a partner to help build out his network of superchargers or filling stations for electric cars.

Two More Reasons why Volkswagen is a Great Company

The electric car project shows us two other reasons why Volkswagen is a great company.

First, it diversifies its operations and reduces risks by producing a wide variety of automotive products. This gives it additional revenues and a much larger market. If something like diesel does not work out, it has alternatives waiting in the wings.

Second, Volkswagen does not rest on its laurels; it engages in research and development (R&D), so it does not get caught by surprise by changes in technology. It has already done the R&D needed to lay the groundwork for electric car production.

The Challenge from Toyota

Volkswagen will face some major challenges in the near future, the biggest of which will come from Toyota Motor (NYSE: TM), the world’s number two car company. Toyota’s decision to avoid diesel and develop other technologies such as hybrids and fuel cell vehicles now seems very wise right now.One way Toyota can capitalize upon the diesel catastrophe is to aggressively market its Mirai fuel cell vehicle, which is now in production. Since the only pollution the hydrogen-burning Mirai puts out is a thin cloud of water vapor, Toyota could generate a lot of great publicity fast by selling it now.


Toyota certainly has the resources to bring Mirai to market if it wants. The Japanese giant reported TTM revenues of $243.08 billion, a net income of $19.51 billion, a free cash flow of $541.65 million, cash and short-term investments of $37.66 billion and  $34.24 billion in cash from operations, on June 30, 2015.

Like Volkswagen, Toyota is also undervalued by Mr. Market. It reported a market cap of $184.52 billion and an enterprise value of $309.54 billion on September 30, 2015. Yet it was also very good to investors; Toyota offered investors a dividend yield of 2.79%, an EPS of 12.36, a profit margin of 9.25% and a return on equity of 13.88%.

Volkswagen Is Still a Value Investment

Yes, folks Volkswagen is still very much a value investment thanks to the scandal. It is still a great company with a very bright future that has a lot of cash and makes a lot of money. If you’re interested in adding an auto company to your portfolio, it is well worth a look.

If you’re uncomfortable with the ethics there, Toyota, which stayed away from diesel, is also a really good company. Automakers are still very much a value investment, one that will keep paying off for years to come because people will still need transportation no matter what technological developments and economic changes come our way.



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