Scandals & Super Returns – A Primer

While recently embarking on a deep dive research project/paper on solvable, one-time corporate scandals which have shaken enterprises throughout history to their very core and the long-term result of investing in said businesses during such traumatic times in their respective histories; a most relevant and timely case study surfaced, as explained below:

The second largest automaker in the world (briefly held the top title in the first of this year, but who’s counting), owner of a dozen automobile brands including such world famous names as Audi, Porsche, Bentley and Lamborghini and a not in-substantial financial services division, a testament to German engineering prowess itself – i am indeed talking about none other than Volkswagen AG. The now beleaguered car maker who has found itself reeling from a series of management indiscretions related to its standard vehicle emissions testing.

Despite the company’s potential liability from such indiscretions being still very much open-ended and up in the air as of this writing and the future of its business (as it is known today at least) being in legitimate question, as my personal notes below go on to show, had one taken the time to look beyond the veneer of attention grabbing headlines or been fortunate enough to simply stumble upon the situation through sheer dumb luck as in my particular case;) they would have been amply rewarded today, had they also been courageous.

 

– Owns 12 automobile brands (including VW, Skoda, Audi, Bentley, Bugatti, Lamborghini, Porsche) & a financial services division.

– Volkswagen brand passenger vehicles make up just over 50% of the group’s annual revenue. Audi branded passenger vehicles account for approx. 28% of group revenue. Skoda passenger vehicles round out the top three with 6% share of revenue.

– European market accounts for 59.5% of annual group revenue, Asia-Pacific second largest market with approx. 18% & North America with 14%.

– Group effective tax rate in FY 2014 was 30%. This is in line with German corporate tax rate of 30-33%.

– Dual class (preferred & common) share structure. Common shares (publicly listed on German Deutsche Borse carry a 3% plus annual div. yield).

– Group off-balance sheet contingent liabilities & financial obligations total $31.8 Bil. Euro. These include purchase commitments for PP&E, obligations under long-term lease and rental agreements & credit commitments to customers.

– Emissions rigging scandal can carry up to a max. of some $18 Bil. Euro + in penalties/fines, not to mention prospective class action lawsuit settlements + other European governmental fines. As of Dec. 31, 2014 group had $19.1 Bil. Euro in cash & equivalents, $10.86 Bil. Euro in marketable securities & $14.61 Bil. Euro in capital reserves on hand.

– FY 2014 Capex amounted to $10.1 Bil. Euro

– Majority of group pension plans are defined benefit – carrying approx. $29.8 Bil. Euro in commitments. Annual pension expenses amounted to $1.8 Bil. Euro in FY 2014.

– Days inventory, sales & payables outstanding have all deteriorated over past few years.

– Book value: $90.1 Bil. Euro ($70 Bil. Euro is simply retained earnings)

– Reproduction value: $34.1 Bil. Euro. Current market value (as of 11.12.15) $68.67 Bil. Euro

– Purchased initial stake at approx: $49.6 Bil. Euro market value ($95-$97.50 Euro per share)

 

Also see Professor Damodaran’s write up on Volkswagen for some additional context as well as various base cases.

Is this proof that crime (corporate scandals) does pay (investors)? We will all just have to wait and see for the empirical case study results.

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