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Stock Strategist

Diesel-Gate Dings VW

The stock's trading at a wide discount to our fair value estimate, but it's not for the faint of heart.

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Until last week, the only formal statements on criminality in  Volkswagen's (VLKAY)/(VLKPY)/(VOW)/(VOW3) "Diesel-gate" were allegations by the Environmental Protection Agency and the California Air Resources Board as well as the assumed-guilty-before-proven-innocent speculation coming from the press and automotive industry talking heads. However, no-moat-rated Volkswagen's latest press releases, including former CEO Martin Winterkorn's resignation statement and supervisory board statements, have caused us to increase the detrimental impact to VW's enterprise value from the diesel engine emissions scandal. These statements confirm that there was a flagrant disregard for the law within the organization. We are reducing our fair value estimate to $42 from $47 and to EUR 190 from EUR 210.

Even after assuming harsher fines and penalties, as well as our assumptions for degradation of the brands, Volkswagen shares appear to us to be oversold, trading at a wide discount to our fair value estimate. Even so, under the current circumstances, Volkswagen stock is not for the faint of heart. Caution is warranted as the shares are likely to be volatile from heavy news flow hitting the markets on the likely myriad company announcements about management changes and the criminal investigation.

Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.