Don’t Believe the Hype: VLKAY Is a Smart Buy

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The Volkswagen (VLKAY) story has been in the news for weeks now. And as usual, wherever the story started was just the beginning.

Volkswagen VLKAY

But, as the story has unfolded, first estimates grew and the plot thickened. The contrarian in me knew there was something in all the scandal — opportunity.

As financial reporters threw out Volkswagen stock numbers, the scandal that started in the U.S. meant other countries would then start looking into the issues. VLKAY’s other brands (Audi, Seat, Skoda and Porsche) were certain to come under scrutiny as well.

Minimal Impact in the U.S.

However, the fact is diesel standards are very high in the U.S., which is why fewer diesels are sold in the States. It’s also why, unlike almost everywhere else in the world, diesel fuel is more expensive in the U.S. than unleaded gasoline.

To meet these standards, it’s expensive to make smaller engines (for cars) profitable in the U.S. market. So, VLKAY rigged the game. Yet, bear in mind that diesel cars in the U.S., according to WardsAuto, have a lower market share (2.5%) than alternative fuel cars (3.5%).

In Europe, diesel market share is 53%. Globally, diesel cars make up about 20% of the fleet. Diesel is a big deal in international markets, especially Europe, because fuel is much more expensive than it is in the U.S. Diesel is a lower grade fuel that’s cheaper to produce, and thus cheaper at the pump because, while fuel taxes are high, Europe’s diesel fuel and emission standards are lower than the U.S.

That makes this controversy less significant outside the U.S., and given the fact that VLKAY doesn’t sell a large number of diesels in the U.S., it doesn’t really effect Volkswagen stock.

VLKAY Isn’t Alone

Indeed, there will be some some feelings of betrayal from consumers who thought buying clean diesel was “green,”‘ but this isn’t a safety issue. The cars are not substandard or unsafe. VLKAY simply gamed the system and got caught. It’s not making Corvairs or Pintos. It pollutes more than it should. And, the recall is voluntary since this isn’t a safety risk; many owners may not even take their cars in for fear it will hurt their vehicle’s performance.

What’s more, investigators are discovering that this isn’t just a VLKAY issue. It’s beginning to look like many other manufacturers have been gaming the system for years as well.

While that’s certainly not encouraging, what it means is the whole industry has been misrepresenting emissions. VLKAY, while not innocent, isn’t doing anything worse than anyone else. That means regulators will look for systemic change, rather than punitive retribution, against VLKAY.

Impact on Volkswagen Stock

So, let’s look at the numbers as they stand today, which is likely the high tide mark in this scandal.

Europe’s recall is far more significant than the U.S. numbers. In Europe, the recall accounts for 8.5 million cars. In the U.S., about 500,000. And, VLKAY has put aside about $8 billion to sort out the needed repairs.

In FY2014, VLKAY sales were about $202 billion. The operating profit was $12 billion. It’s revenue was higher than Toyota’s (TM). It has a 13.5% market share of the global automotive market and is one of the top brands in Asia, particularly in China.

The stock is off 44% year to date. These numbers don’t add up. The stock is wildly oversold at this point, and while it will have some bad press for a while, this isn’t a wound that won’t heal. VLKAY is now kicking off a 4.3% dividend that is about as safe as you can get.

Bottom line: At these prices, this is a good stock in a bad situation and worth a look for the long term.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/dont-believe-hype-vlkay-smart-buy/.

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