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What's going on?
Despite being shrouded in a scandal that would make Taylor Swift proud, German car maker Volkswagen (VW) unexpectedly announced profits of 4.4 billion on Wednesday – its best quarterly profit ever! Shares jumped 6% on the news.
What does this mean?
VW stock had been down 30% since last September, when the US Environmental Protection Agency discovered that its diesel cars were cheating on emissions tests and polluting far above the limit. The scandal quickly spread across borders, leading to investigations and lawsuits around the world (VW disclosed an additional 2.2 billion in legal costs on Wednesday, raising the running total to over 18 billion). However, the company seems to be moving on operationally as it showed a strong performance as a result of both marketing improvements and cost-cutting.
Why should I care?
The bigger picture: The problem with legal risks is that they tend to stick around.
VW may be showing signs of improvement… but theres still a lot of uncertainty concerning the fallout from the emissions scandal. And uncertainty = risk. With any big scandal, legal costs often continue to mount far longer than anticipated (just this week, 3 US States brought new lawsuits against VW) and its tough to predict when theyll end. Just look at the banks – theyre only just seeing the end of legal proceedings from the 2008 crisis!
For the stock: The scandal is expensive, but it wont necessarily hurt VWs future in a big way.
Global sales of VW vehicles still managed to gain 1% this year in spite of the scandal (for VW, the US is a small market compared to Europe and China). The company recently outlined a future built largely on electric cars – and it’s the success of initiatives like that which will likely determine its long-term value.
Originally posted as part of the Finimize daily email.
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