Why the Volkswagen Stock Price Rally Won't Last in 2016

The Volkswagen stock price climbed more than 6.5% today, and it's now up more than 36% from its 52-week low of $22.71.

But don't expect the Volkswagen AG (OTCMKTS ADR: VLKAY) stock price rally to continue in 2016...

Volkswagen stock priceToday's rally for the Volkswagen stock price came after the company announced late Wednesday that it doesn't expect the emissions scandal of 2015 to affect earnings as much as once anticipated. The company didn't offer specifics, except that the $2.2 billion figure initially estimated may be too high.

Even if the earnings damage is less than anticipated, Volkswagen still has a major problem. And the fines, lawsuits, and the large blot on VW's once-stellar reputation will plague the automaker next year and beyond.

In September, Volkswagen admitted that as many as 11 million of its diesel vehicles worldwide had software that could cheat nitrogen oxide emissions tests. The company will need to recall some 500,000 cars in the United States and about 8.5 million in Europe.

The scandal has already put a serious dent in VW's sales worldwide and greatly impacted the Volkswagen stock price:

  • Volkswagen vehicle sales tumbled 25% year over year (YOY) in the United States in November.
  • VW vehicle sales in the United Kingdom plunged 20% in November YOY. That followed a 10% decline in October. Official figures from the Society of Motor Manufacturers and Traders showed VW sold 12,958 vehicles in the UK last month. That compares to the 16,196 vehicles sold in the same period a year ago.
  • In Great Britain, VW's fourth-biggest market, its share of vehicle sales slipped to 7.2% from 9.4% YOY.
  • In VW's home market of Germany, sales declined 2% in November. The modest decline was likely due to "some element of patriotism," according to Euromoniter. But even the modest 2% decline was stark given the overall auto market grew 8.9% last month in the country.
  • In France, November sales rose 4.4%, limping behind the overall market's robust 11% growth.
  • In China, VW's biggest market, sales grew an uninspiring 1.8% in October compared to the overall market's 11.8% growth.

The smaller drop across Europe could be due to the fact that cars in the region are ordered ahead of time and delivery often takes months. So cars registered as sold in November were actually ordered well before the scandal was made public.

The Volkswagen stock price has fallen 28% in 2015, even with today's rally. And VW stock will keep sliding from here.

That's because more damaging news about the scandal continues to surface...

Volkswagen Stock Price Slide Will Continue in 2016

As it turns out, VW withheld information from U.S. regulators long before the diesel emissions scandal was made public in September.

The automaker's U.S. environmental compliance employees notified their superiors in Germany in 2004 that they believed Volkswagen needed to alert regulators about a faulty emissions part on dozens of cars from Volkswagen's Audi unit.

But no action was taken.

The true cost of how much "Dieselgate" will impact the Volkswagen stock price is still unknown. The recall costs and fines are still unclear. But VW has already allocated about $7.3 billion to deal with costs relating to the scandal.

However, some say the cost could be much more than that...

A Credit Suisse analyst has reported the Dieselgate cost could reach a whopping $87 billion in a worst-case scenario.

That would make the VW scandal almost 60% more costly than the BP Deepwater Horizon spill. A potential $87 billion in losses would be almost seven times the German automaker's net profit for 2014.

And you can't put a price on the monetary loss of VW's once-esteemed reputation.

"The reputational damage to the VW brand may represent an extinction-level event," Money Morning Chief Investment Strategist Keith Fitz-Gerald said in September.

In early October, Fitz-Gerald warned investors who might be mulling a VW stock trade to not go bottom fishing yet. "In the words of branding expert Jim Prior of Lambie-Nairn in London, VW will 'have to live with the legacy of being a brand that cheated,'" Fitz-Gerald said.

All of these things will impact earnings in years to come, Fitz-Gerald continued.

In the last 12 months, the Volkswagen stock price has fallen 31.3%. Now is not the time to buy in before 2016.

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