The scale of the market’s reaction to the Volkswagen (ETR: VOW) emissions-manipulation scandal has been nothing short of remarkable. For those not ‘in the know’, the German car giant has admitted to cheating emissions tests in the United States, fitting devices to their diesel engines that could detect when pollution tests were being conducted.
It is estimated that around 11 million vehicles worldwide contain the technology, and Volkswagen has set aside €6.5bn to cover potential costs. But the final bill could far exceed this figure as a raft of investigations across the US, Europe and Asia are expected. And the damage to Volkswagen’s reputation could be much higher — VW America boss Michael Horn has admitted the news has “broken the trust of our customers and the public.”
Components creator on the rack
But Volkswagen has not been alone in seeing its share price tank as a result of the scandal. Indeed, car and auto parts builder GKN (LSE: GKN) saw its stock value haemorrhage more than 7% in Tuesday business, although it has recovered some ground and was recently 2% higher today.
Such weakness is understandable as the Redditch firm counts Volkswagen amongst one of its most important customers — around 15% of revenues at the firm’s GKN’s Driveline arm come from the carmaker, while its Powder Metallurgy and Land Systems divisions also build parts for Volkswagen.
Still, a report issued from UBS suggests that the share price downturn of recent days could be severely overcooked. The broker says that “while we do not know to what extent the reputational damage could hurt VW’s future sales, we believe the impact on GKN is likely to be trivial.” The broker estimates that even if Volkswagen sales were to fall 10% following the scandal, GKN’s total sales and profits would only be adversely affected by around 0.7%.
It is natural that GKN has shuttled lower as the scandal adds to existing worries over Chinese auto sales. But with an expected 7% earnings uptick for 2016 leaving the business dealing on a P/E rating of just 9.9 times, for many this could represent a prime buying opportunity.
Jubilee gives little cause for celebration
However, the fallout of the Volkswagen crisis has also led many to question the future of the diesel engine, a catastrophic scenario for the platinum market — just under half of total metal is used in catalytic converters to clean up diesel emissions. With regulators reassessing the impact of diesel fumes on air quality following Volkswagen’s admission, I believe platinum prices could be set to shuttle much, much lower.
Precious metals play Jubilee Platinum (LSE: JLP) has already seen its share price shake violently in recent times as investors have weighed up positive news concerning its two surface tailings projects against a volatile platinum price. Indeed, the business was recently dealing 9% lower in midweek business as the white metal collapsed to six-year lows below $930 per ounce.
With questions also raging over the future of platinum off-take for jewellery and investment purposes, I reckon the fanfare surrounding Jubilee Platinum’s “transformational” technologies could be swallowed up if metal prices keep on sinking.
Retailer’s outlook remains robust
Should Volkswagen suffer a significant demand slump in the wake of recent revelations, salesmen at British car dealership Inchcape (LSE: INCH) could be left shaking their heads in the coming months and years. The business is the German manufacturer’s largest single retail hub in the UK and operates 20 outlets offering vehicle sales and servicing.
Inchcape suffered an 3% share price decline in Tuesday trading as fears intensified but, like GKN, has fought back and was last around 1.6% higher on Wednesday. And with good reason — although the damage to Volkswagen’s image leaves it more susceptible than many of the FTSE’s other car retailers, the underlying strength of the car market should continue to drive sales at Inchcape higher, in my opinion.
The London firm saw total revenues edge 1.3% higher during January-June, to £3.4bn, helping underlying operating profit surge 5.6% to £159.2m. With UK and European vehicle sales stomping determinedly higher, and Inchcape boasting significant exposure to emerging markets across the world, I believe investors can look forward to solid long-term returns as global car demand steadily rises.
