Good Report About Evaluating Volkswagen’s Disclosure In Its Third Quarter 2015 Interim Report

About 5% of the pension fund’s investments have been made in Volkswagen Group which has recently fallen prey to a major scandal. These investments face high risk, now that the company’s share price has fallen considerably. On 18th September 2015, few Volkswagen cars were found to be emitting lethal amounts of nitrogen dioxide into the atmosphere despite having passed various pollution control tests. This irregularity in the diesel engines was caused due to engine management software which was deliberately fitted in each car belonging to a particular model. More than 11 million vehicles have thus, been estimated to be removed from markets worldwide.
The software was fitted in order to bypass the pollution control tests. It reduced the emissions to a standard level when tests were run thus, fooling the environment protection agencies and the customers that their cars were ‘clean diesel’ models. Higher nitrogen dioxide emissions and smog allowed the cars to run with more power. The company has taken full charge of the serious allegations put on them. As per the interim report pertaining to the third quarter of 2015, the company has disclosed all relevant details of the scandal. As a result, the Chief Executive Officer, a member of the Board of Management who was responsible for Sales and Marketing of passenger cars and another member of the Supervisory Board resigned from their positions in the respective quarter.
The value of investments made by the pension fund in Volkswagen’s shares has seen a major decline in the previous quarter. The company’s shares have fallen considerably since the diesel engine scandal got exposed. The price of the company’s equity share fell by 42% and preference share by 47% by the end of September 2015. The company’s credit and sustainability ratings have also been downgraded from positive to negative by all independent rating agencies. The company also faces the risk of incurring huge financial and legal costs in the upcoming months. Several criminal and civil lawsuits have been filed against the company by government agencies, environment protection agencies, investors and customers in the last few months. The company is not in a position to estimate these costs since they are all contingent in nature. The company has although, decided to call back the affected vehicles from the market and repair their defected software and hardware, if any free of cost. The company has already decided to provide €7 billion for the risks and costs involved in the entire process. Net sales and market momentum declined after the scandal came to fore especially in the US, European and Asian markets. In the third quarter, the company also incurred a loss of €1,673 million due to which the Earnings per Share also turned negative.
With a scandal such as this one, Volkswagen faces insurmountable legal and financial risks. The US Environmental Protection Agency and the corresponding authority in Canada have already begun civil proceedings against the company. Huge monetary fines are likely to be imposed by them which have not been estimated by the company yet. Criminal proceedings have also been initiated by the Department of Justice, investors, attorney generals and customers in the USA and other parts of the world. The list of litigations initiated against Volkswagen is quite comprehensive and predicting the financial liabilities or the future of the company is not possible.
Volkswagen has openly admitted to the irregularities in the engines and is willing to work with investigating and regulatory authorities. The company has also set up an independent investigating committee to probe into the matter internally. The committee will be scrutinizing the case and will be reporting the findings to the company’s Supervisory Board on a regular basis. An independent external investigation has also been ordered by the company which shall be taken up by a US law firm, Jones Day.
The scandal has revealed a major flaw in the corporate governance of the company. Such a scandal has exposed the management and the governing authorities of the company. With the stepping down of major members of the Board of Management, it is quite evident that the decision to employ ‘cheat software’ in the cars was taken under incentive or market pressures. An unethical corporate decision resulted into a heavy blow to the share price of the company within a few days of the scandal’s revelation. Moreover, the company now faces civil and criminal proceedings from all parts of the world resulting into heavy losses in the third quarter. The company also has no means to access and implement its capital market programs since all rating agencies have relegated the company’s ratings to a minimum.
The Company now plans to invest sheepishly in plant, equipment and property in the next year. The company’s new CEO, Mr. Matthias Muller has recently declared a reduction in net investments by approximately €1 billion for the next year. The company also does not have any future investment outlays except the one for the upcoming year. With a massive decline in the share price, the company now plans to rectify its past mistakes by concentrating more on introducing environment friendly vehicles, advanced engine technology and better products. An analysis of the market share price reveals that the price of the company’s stock will take several more months to return to normal. The prices are still down by 20% and it is highly unlikely that they will increase exponentially in the next few weeks.
With almost 5% of investments of the pension fund being stuck in Volkswagen, the fund faces a huge risk. The company’s share price has fallen considerably since the scandal went public and it is quite uncertain that they’ll break records in the future. Moreover, the company has huge impending expenses in the form of litigations, which is why the company is expected to take several months to resume earning huge profits. Investors are more likely to incur losses and face risk if Volkswagen’s stock is kept on hold. It is highly unlikely for investors who are already holding its stock to receive higher dividends or better returns in the near future. Analysts believe that Volkswagen’s stock should not be bought as of now since its stock is not estimated to increase beyond a limit in 2016. However, for those funds which have already invested in Volkswagen, it would be preferable for them to shift to another stock belonging to the same industry.
The share of investments in Volkswagen is highly likely to result into losses. Thus, it is advisable for the pension fund to short Volkswagen’s shares and invest in another automobile or Car Company such as Audi AG or Diamler AG which has a higher dividend per share.