EUR 850.00 For Business Accounts Only

Morningstar | Audi Fined EUR 800 Million by German Public Prosecutor; Maintaining Our EUR 230 FVE for VW

No-moat-rated Volkswagen's Audi brand was fined EUR 800 million by a German public prosecutor, consisting of a maximum penalty of EUR 5 million and a EUR 795 million disgorgement of economic benefits. Audi's press release referred to the prosecutor issuing an "administrative order" against the company for "deviations from regulatory requirements" in the manufacturing and sales of certain Audis equipped with V6 and V8 diesel engines. We view the fine as manageable, given Volkswagen's net liquidity of EUR 26.3 billion at the close of the second quarter.

We maintain our EUR 230 fair value estimate for Volkswagen, as the EUR 800 million fine has less than a 1% impact. Our fair value estimate continues to include a EUR 20 billion reduction to our enterprise value due to the remaining potential European litigation. In addition, we assume margin contraction relative to Volkswagen's 10-year historical performance to reflect higher spending for industry-disruptive technologies, including mobility services, autonomy, and electrification. We contract margins through our five-year forecast from 7.2% in 2018 (versus 8.7% in 2017) to a normalized sustainable midcycle of 5.1%. Our midcycle assumption represents a 170-basis-point reduction from the 10-year median. Even so, the 4-star-rated shares of Volkswagen trade at a compelling 29% discount to our fair value estimate.

In June, the Volkswagen brand was fined EUR 1.0 billion under the same legal framework. There remains only a limited number of diesels from Porsche for which Stuttgart prosecutors could fine the company. Because of the nature of the fine, EU regulations preclude any other EU country from fining the company for the same breach of management monitoring duties.

However, other matters could still be litigated, including stock market manipulation by a lack of timely public notification of the diesel issue and consumer agencies seeking relief similar to remuneration received by U.S. consumers who had the option to have Volkswagen buy back the vehicle or receive $5,100 cash plus free repairs. A shareholder lawsuit for lack of timely disclosure, which began in September, alleges EUR 9.2 billion in damages but could take a year or longer before a verdict is reached. The fine is also unrelated to the ongoing investigation regarding diesel equipment collusion among all three German automakers.