Volkswagen's Risks May Be Overlooked Despite Press Disaster, Analyst Warns

Shares of Volkswagen's ADR traded to new 52-week lows of $22.71 on Friday as the issue has lost more than half of its value since its 52-week highs of $52.87. Investors and traders likely sold the stock following a cautious report by analysts at Credit Suisse. In a report published Friday, Credit Suisse analyst Alexander Haissl commented that the market is not discounting the "negative knock-on effects" following the diesel engine emission fiasco. The analyst noted that the final outcome for Volkswagen's recall costs and fines is "unclear" and could range from €23 billion to as high as €78 billion. Haissl continued that Volkswagen also faces "material risks" to its Financial Services business, which has "materially" expanded its balance sheet (close to €150 billion) to support growth. The analyst suggested that this risk may be "overlooked" as it will place pressure on the firm's capital ratio. At the same time, a balance sheet expansion without capital injection from the industrial business "looks more challenging." Finally, Haissl pointed out that the company's industrial net cash position of around €25 billion is "unlikely to be sufficient" to cover potential recall costs and fines. The analyst also suggested that while the company attempts to spread costs over several years, its "biggest fundamental problem" remains a lack of cash flow generation with more than 80 percent stemming from China.