3 Reasons To Avoid Volkswagen
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
3 Reasons To Avoid Volkswagen
- It’s Got An Enormous Amount of Debt
Normally in these articles I talk about other things like valuation, profitability, cash flow, the affects coronavirus is having on a company’s financials, and other things.
And while some of those do matter – which I’ll talk about below. There is one major reason to avoid Volkswagen (VWAGY) stock that affects everything else we’re going to talk about today…
Its enormous amount of debt.
On July 29th 2020 it was reported that Volkswagen is now the most indebted company on Earth with $192 billion worth of debt.
I’ve shown you a lot of stocks with huge amounts of debt in recent articles… But even this amount was staggering when I first saw it.
$192 billion… This is more debt than the entire government of South Africa has right now with it sitting at $180.1 billion.
And much of this debt is from its auto financing department… I’ll tell you further below why this potentially means even larger issues for the company.
Its debt to equity ratio is a manageable 0.8… And I like to invest in stocks that have debt to equity ratios below 1.
But this is also why I never rely on only one metric when evaluating a stock because one metric often doesn’t show you the full story.
To put this absurdly high debt load into context as it relates to Volkswagen’s profitability lets compare it to its operating profit and free cash flow production over the last decade.
In the last 10 years Volkswagen’s produced total operating profits of $97.8 billion.
That means it would take an estimated 20 years to pay off this debt in full at its current run rate of operating profits.
That’s if the coronavirus doesn’t limit car companies operating profits going forward. If the company has no major issues related to manufacturing, recalls, errors, etc, in the next 20 years. And if it doesn’t bring on any new debt in the next 20 years..
Those are some gigantic ifs.
And it would never pay off its debt when considering its free cash flow… Over the last decade Volkswagen’s produced a total of negative $58.4 billion in free cash flow.
I want to invest in safe stocks that will be around for decades to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Volkswagen is the opposite of a safe investment for this reason… And also because of the coronavirus.
This gets us to issues to our next reason to avoid Volkswagen stock.
- Uncertainty Related To The Coronavirus
This all circles back to the beginning and the coronavirus.
Air travel, hotels, and restaurants are still getting hammered.
But so are many other industries worldwide. And car manufacturing and selling is one of those.
Car sales have now fallen drastically nationwide in the 1st two quarters of 2020 as this pandemic began raging.
Sales fell 12.7% in the 1st quarter of 2020 compared to the 1st quarter of 2019.
And 34.3% in the 2nd quarter in the year to year period.
This is industry wide.
Ford sales were down 33.9% in the 2nd quarter compared to the prior year period.
Volkswagen sales were down 23% in the January to March 2020 quarter on a year to year basis.
And they were down 45% in April on a year to year basis.
This is the most updated info I have as of this writing since Volkswagen hasn’t released any updated info. But car sales are still down drastically worldwide due to the continued explosion of new coronavirus cases.
Another problem related to car sales and the ongoing crisis is the data that just came out of China…
Last week China released it latest car sales data and they’re still down 6.5% from this time last year.
China is months ahead of us in terms of controlling the virus and its auto sales are still negative.
This means US focused car companies are in for months longer of negative sales numbers.
But this is an even bigger problem for Volkswagen than a US focused car manufacturer…
It doesn’t just sell in the US… It sells its cars worldwide. And much of the world is either on lockdown still. Going back on lockdown. Or seeing huge rises in coronavirus cases that could lead to lock downs.
This means you should expect Volkswagen to earn far lower revenue, profits, and cash flows for the foreseeable future.
And with its massive debt load this could lead to huge problems for Volkswagen in the inability to pay its debt.
Unfortunately, there’s even more bad news for Volkswagen and the other car companies when it comes to the coronavirus.
- Auto Loan Delinquencies
Because tens of millions of people are unemployed nationwide and hundreds of millions are unemployed worldwide, people are getting further and further behind on paying their debt.
This includes car loan payments.
The chart above shows the percentage of auto loans more than 90 days delinquent.
As of May 2020, we’re now sitting at an estimated 5.1% auto loan delinquency rate. Meaning for every 100 vehicles loans, 5 are now 90 or more days without being paid.
This is a record.
And much of those payments are financed directly by the car companies loan departments.
This is where Volkswagen having most of its debt from its financing department can lead to enormous problems for the company.
If people aren’t paying Volkswagen auto loans that’s bad enough. But if these same people have their loans through Volkswagen’s financing department and they can’t pay, this is like a double whammy for the company.
Because if people aren’t buying new and used cars and aren’t paying their auto loan bills this leads to far lower revenue, profits, and cash flows Volkswagen can use to pay its debt.
No new data is out as of this writing which makes this info more than 2 months old. And this means the delinquency numbers are guaranteed to be even higher now due to the continued mass unemployment.
For all the reasons talked about above car companies are in massive trouble.
And with Volkswagen having the most debt of any public company on Earths this will negatively affect them more than its competitors.
I recommend you stay far away from this entire industry for the time being for the reasons above. But especially stay away from Volkswagen.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.