Is Volkswagen Stock Cheap Enough to Buy After Emissions Scandal?

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This is ugly. Shares of Volkswagen (VLKAY) were down nearly 20% Monday morning after news broke that the world’s largest automaker had systematically cheated on U.S. emissions tests to make its diesel engines appear more eco-friendly than they really are.

Under the Clean Air Act, Volkswagen could be on the hook for fines of $37,500 per car affected. If federal prosecutors really want to put the screws to Volkswagen, that would amount to an $18 billion fine. To put that in perspective, Volkswagen stock has a market cap of 63 billion euros, or about $71 billion, so we’re talking about a fine equal to a quarter of the company’s value.

The U.S. may or may not go for the jugular, and it’s entirely possible that the company will negotiate a much lower fine. And even if the VLKAY does end up having to cough up the entire $18 billion, it’s not likely to bankrupt the company.

But this is still a very big deal and, unfortunately, probably just the tip of the iceberg. Already, Germany is launching an investigation of its own to see if Volkswagen cheated the emissions regime in its home market too. And seeing as how no regulator wants to appear to be asleep at the wheel, you can expect plenty of “me too” investigations from VLKAY’s markets around the world.

Even before this scandal broke, Volkswagen stock was cheap. Shares traded for just 7 times earnings and yielded 3% in dividends. And the Volkswagen stock price finished last week a full 31% below its 52-week high. After today’s bloodbath, the shares are trading at 6 times earnings and at a little more than half their 52-week high.

Volkswagen Stock a Tricky Play

So, with the proverbial blood running in the streets, might Volkswagen stock be a buy?

Yes and no. At today’s prices, I consider Volkswagen a very decent bargain. If you were to buy Volkswagen stock and not look at your account statements for five years, I would expect that you’d be happy with your returns come 2020.

Furthermore, Volkswagen’s dividend — now yielding a juicy 3.7% — will probably be safe. The dividend payout ratio is currently a very modest 21%, and I don’t see things getting so bad for Volkswagen that a dividend cut becomes necessary.

But all the same, I recommend that you resist the value investor’s impulse to buy too early. VLKAY, along with most other Big Auto stocks, has been dropping like a rock since May, and this was before the scandal broke.

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And the problems Volkswagen faces go beyond the obvious fines and investigations. Shareholders will no doubt be calling for CEO Martin Winterkorn’s head on a platter for allowing this to happen on his watch. He nearly lost his job earlier this year due to agitation by a major shareholder. It’s hard to see him surviving this.

A management shake-up will probably be necessary to rebuild confidence in Volkswagen. But such a move also brings an entirely new level of uncertainty.

For an idea of what may be in store for Volkswagen stock, consider the case of Vereit (VER), formerly American Realty Capital Properties. Following an accounting scandal last fall, the stock lost roughly a third of its value. There were investigations… and audits… and lots of finger pointing.

Management got the boot, and the company was even renamed to give it fresh start. By all accounts, the slate has been wiped clean, and Vereit is an attractive stock trading at a fantastic price.

Yet nearly a year after the scandal broke, VER still trades close to its 52-week low. Reputations take time to rebuild.

So, is Volkswagen stock cheap? Yes, it is. But is it a buy today? I would say no.

By all means, keep an eye on Volkswagen stock. But I would recommend waiting at least another couple months before pulling the trigger and buying.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long VER. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/scandal-volkswagen-stock-cheap-enough-buy/.

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