The Volkswagen Scandal: An Accident Waiting To Happen? by Jennifer Thomson, Gavekal Capital Blog
To say that it has been a rough couple of days for Volkswagen would be a definite understatement. The company’s stock price fell nearly 25% yesterday (on an absolute basis), generating a 30% relative underperformance– and taking out historic support in the process– on our point-and-figure chart:
You will notice the stock’s struggle to maintain the uptrend that began in 2011 started sometime in the middle of last year. One of the benefits of this methodology is its ability to telegraph information that we might not see in our thorough look at a company’s fundamentals. Of note, neither Volkswagen nor any of the other European Automobile Manufacturers (point-and-figure charts at the end) manages to fulfill our fundamental screening requirements to be considered a Knowledge Leader. That might seem counter-intuitive, given the necessary high levels of spending on R&D, advertising, and other intangibles one associates with auto manufacturing. And that instinct is correct– all six of the European companies included in our developed market index meet the threshold for intellectual property investment. Most fail, however, to generate high enough gross margins (>20%) and/or maintain low enough levels of financial leverage (<3x).
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A quick look at our intangible-adjusted data reveals that Volkswagen leads the group, spending more than 4% of sales on R&D (which is just slightly above the average for Automobile Manufacturers worldwide– the only company that really stands out on this metric is Tesla, which spends 15.6% of sales on R&D):
Daimler and Peugeot stand out in the group with the highest IP as a percent of total assets:
BMW and Daimler are the only two in the group that manage to produce gross margins in excess of 20%:
Unfortunately, though, neither of them seems to be able to maintain a positive free cash flow margin:
Renault is the only company with financial leverage below 3x:
The silver lining in all of this: at least they aren’t terribly expensive relative to the MSCI World Index?
It seems reasonable to assume that sales and earnings growth estimates will shift quite a bit further to the downside in the wake of the Volkswagen scandal:
All of this mediocre (intangible-adjusted) fundamental data is well represented in our point-and-figure charts for the group. BMW appears stuck in (and headed back to the bottom of) a trading-range:
Daimler’s breakout attempt has been waning for a while already– will current events prompt a definitive confirmation of a failure?:
Peugeot’s recovery over the last few years appears to be in jeopardy as momentum has slowed considerably this year:
The uptrend in Renault’s stock price was violated about a year ago and the recent rally that has fizzled would seem to indicate an area of strong overhead resistance has formed:
All of the above would seem to suggest that Volkswagen’s admission of emissions-related shenanigans is merely the proverbial straw that broke the camel’s back for an already struggling, mediocre group of companies.