Volkswagen: Time to Buy Post-Emissions Scandal?

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Volkswagen AGVLKAY has been facing significant trouble since the Environmental Protection Agency ("EPA") revealed that the company had developed a software algorithm to deceive U.S. emission tests. Volkswagen admitted that its diesel vehicles are installed with software that makes the engines appear to have low emission levels during tests.

According to the EPA, these vehicles emit nitrogen oxides, or NOx, at almost 40 times the standard amount. Nitrogen oxide emissions lead to smog and acid rain, and can cause serious health concerns like lung cancer.

However, recently Volkswagen has been taking significant steps toward solving its emissions problem and getting back on the growth trajectory. Is it a good time to buy the stock? Let's find out.

Key Strengths & Strategies

Volkswagen is witnessing strong sales volumes, which should boost its revenues. The automaker's global sales improved 0.8% year over year to 4,233,500 vehicles in the first five months of 2016 from 4,198,900 vehicles delivered in the same period a year ago. The company benefited from better delivery and steady growth in Europe and the Asia-Pacific.

Recently, the Federal Motor Transport Authority issued approval for recall of 1 million vehicles - primarily Golf models. With this, approval has been granted to more than 3.7 million affected vehicles, including the VW Passat, Tiguan and Caddy, all variants of the Golf, the SEAT Exeo and the ŠKODA Superb plus various Audi models such as the A3, A4 and Q5.

Earlier this month, Volkswagen received approval from the German motor vehicle agency, KBA to recall and repair 800,000 of its vehicles, mainly the European versions of the Volkswagen Passat, CC coupes and Eos convertible models with 2-liter engines. These vehicles can be repaired simply by updating the software which controls the emissions system.

Volkswagen is also putting emphasis on costs. The company plans to maintain strict discipline regarding its capital expenditure.

Many automakers are focusing on transforming from being only an auto manufacturer to a mobility company. Volkswagen will also grab this opportunity to become more profitable. The automaker is laying foundation for being a mobility company, emphasizing on e-mobility, autonomous driving and digitalization with the TOGETHER - Strategy 2025. In this strategy, the company has laid down its plans for the next decade.

Per its Strategy 2025, Volkswagen will be focusing on electrifying its vehicles. About one-third of the vehicles of the company will be electric vehicles by 2030. The company will be launching 30 fully-electric new vehicles by 2025. During this period, the company also expects to sell 2 to 3 million electric automobiles per year, representing about 25% of the total sales volume.

The auto industry is also focusing on autonomous driving and battery technology. By the beginning of the next decade, Volkswagen expects that fully autonomous vehicles with a self-driving system will enter the market. The company also intends to invest several billion euros for this new mobility solution. The automaker also plans to develop its battery technology, which is a key to e-mobility.

Volkswagen will also be realigning its components business. This will provide greater entrepreneurial freedom to the components business.

The second major step under the Strategy 2025 is the creation of the new mobility services business. Volkswagen has already invested in Gett, which has more than 50 million users in the ride hailing market. The automaker now plans to join other services including robotaxis, carsharing or on-demand transport.

Volkswagen is also making investments in an attempt to recover from the emissions scandal. Recently, the automaker announced that it is making investments worth $11.3 million in California. Of the total investment, Volkswagen will spend $4.5 million for a new training center in Eastvale. The remaining $6.8 million was utilized for a distribution center in Rocklin, northeast of Sacramento that will serve 94 VW and Audi dealers in Northern California and the Pacific Northwest.

Following the scandal, the automaker has been trying to rebuild its reputation through small and larger changes. It plans to invest around $7 billion in North America through 2019. This $11.3 million investment is part of the company's $7 billion investment plan.

Value and Earnings Growth Analysis

Volkswagen is trading at a forward P/E of 8.1 and price to sales (P/S) of 0.3, both lower than the respective industry averages of 9.7 and 0.6. The company has a long-term EPS growth expectation of 25.21%, which is quite impressive.

In the last 30 days, the only analyst covering the stock has raised its earnings estimates for this year. 30 days ago, the Zacks Consensus Estimate for EPS for this year was $3.39. However, our estimate has been updated since then, and now calls for earnings of $3.60 per share.

Zacks Rank and Style Score

Volkswagen currently carries a Zacks Rank #2 (Buy) and a VGM score of 'B'. It has a Zacks Style Score of 'A' in Value and Momentum.



Bottom Line

Volkswagen enjoys strong growth potential, compelling fundamentals, an impressive Zacks Rank and Style Score, and solid earnings projections. However, the company is still recovering from the emission scandal. Based on the favorable factors, we think that investors should consider buying Volkswagen shares.

Other automobile stocks to consider include Lear Corp. LEA , Oshkosh Corp. OSK and Superior Industries International, Inc. SUP , all sporting a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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