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Volkswagen: From Despair to Euphoria

Checking  a Golf VII car at Volkswagen AG’s plant in Zwickau, central Germany. Investors eyes should be on the German car maker’s talks with unions.
ENLARGE

Checking a Golf VII car at Volkswagen AG’s plant in Zwickau, central Germany. Investors eyes should be on the German car maker’s talks with unions.


Photo:

Associated Press

By

Stephen Wilmot

July 20, 2016 8:44 a.m. ET

LONDON—The diesel scandal has lost its capacity to shock Volkswagen
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investors. All eyes now should be on the German car-maker’s talks with unions.

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]

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Volkswagen: From Despair to Euphoria Reviewed by on . ENLARGE Checking a Golf VII car at Volkswagen AG’s plant in Zwickau, central Germany. Investors eyes should be on the German car maker’s talks with unions. Phot ENLARGE Checking a Golf VII car at Volkswagen AG’s plant in Zwickau, central Germany. Investors eyes should be on the German car maker’s talks with unions. Phot Rating:
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