July 20, 2016 8:44 a.m. ET
Three U.S. states, including New York, filed lawsuits for environmental damages against VW on Tuesday. The New York prosecutors alone are seeking $450 million in penalties. But the shares only sagged slightly when investors reacted at the German market open Wednesday.
Then Volkswagen unexpectedly pre-released key elements of its second-quarter results. They were better than projected by analysts. Adjusted operating profits will come in at €4.4 billion to €4.5 billion for the period, about 30% higher than consensus, according to brokerage Evercore ISI. The shares jumped, finishing the morning up about 7%.
That is despite VW having to book a further €2.2 billion of impairments to cover escalating legal bills in the U.S. The €16.2 billion charge that pushed the company’s 2015 income statement into the red turns out to have been insufficient.
Crucially, the company said the core Volkswagen-branded business was responsible for the beat. This is the serially inefficient unit based in Wolfsburg, in northern Germany, on which investors’ turnaround hopes depends. The pre-released numbers imply a divisional margin of about 4%, up from 0.3% in the first quarter, reckons UBS.
But it may not pay to assume this is sustainable. Given Wolfsburg’s poisonous politics, the jump in profitability may even be unhelpful. VW-brand management is currently discussing a “pact for the future” with unions. A strong second quarter will make it harder to talk tough on costs.
Investors should wait for the outcome of these all-important labor negotiations before betting big on Volkswagen’s recovery.
Write to Stephen Wilmot at [email protected]