Reflecting this morning's very disappointing employment report for September, U.S. stocks are being pummeled on Friday, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) down 0.25%, and 0.28%, respectively, at 12:15 p.m. EDT.

Volkswagen's Bluesport concept car.

After the closing bell on Sept. 22, I suggested that, based on an analysis of previous corporate scandals, we had yet to see the lows in shares of Volkswagen AG. This was two trading days after the automaker's emissions cheating became public knowledge, and the shares had already been savaged, losing nearly a third of their value.

Although they recovered somewhat during the rest of last week, the slide has gathered new momentum this week, and Volkswagen shares are plumbing new lows today, holding just above 100 euros.

Still, the main point of last Tuesday's column was that the stocks of scandal-ridden companies often overshoot to the downside and can provide interesting opportunities for value hunters.

Another excellent blog post from New York University's Pr. Aswath Damodaran, published early this morning, suggests this is already the case.

Pr. Damodaran valued the company under a base case set of assumptions:

  • The EPA inflicts the maximum possible penalty possible of $18 billion. Fines from other governments total an extra 10 billon euros.
  • Recall and other legal costs of 4 billion euros.
  • A 20% loss in operating income for five years.
  • Fines and legal costs only 50% tax deductible.

Under these assumptions, he values the company's equity at 52 billion euros, or 8% below the market capitalization.

Furthermore, while he labels it a "base case," it's worth noting that he considers those assumptions represent "an extremely conservative assessment of the costs." He also provides valuations under four other scenarios, one which is worse, and three that are more optimistic (he calls the second-best set of assumptions the "likely case"):


Value of Equity (in billions of euros)

% Under- or Over- Valued
(Baseline: 48 billion euros)

Worst Case



Base Case



Better Case



Likely Case



Best Case



If you accept those numbers, shares of Volkswagen look like an attractive risk/reward proposition.

Incidentally, it's worth noting that the $18 billion high-end estimate for the EPA fine, which has been widely repeated, is significantly too high, according to Sanford C. Bernstein auto analyst Max Warburton.

That estimate is obtained by multiplying a maximum fine of $37,500 per car by 482,000 cars with the cheating device in the U.S. However, according to a research note from Warburton, the maximum base fine for a 140 horsepower car is $21,775. In addition, the base fine for the 100,001st car is just 3.2% of the fine for the first car (though other factors, including "egregiousness," can push the fine higher).

On the basis of his analysis, Pr. Damodaran put in a market order for Volkswagen ordinary shares yesterday (which was, of course, executed). I think value-driven investors with a genuine tolerance for volatility should consider making the same move.