Volkswagen pleads guilty in US Court on emission scandal

In the last week of February, German automaker Volkswagen AG (OTC: VLKAF) reported a swing to profit in the fiscal 2016, compared to a net loss in the prior fiscal year. It can be remembered that the owner of Porsche and Lamborghini brands suffered huge losses in 2015 due to the diesel emission scandal. The company has arguably recovered from the loss of reputation. However, considering the series of lawsuits filed by clients and guilty plea at the US District Court in Detroit, we forecast the stock to remain bearish in the days to come.

For the fiscal 2016, Volkswagen posted a net profit of €5.4 billion, compared with a net loss of €1.6 billion in the same period last year. Excluding charges, the company posted record underlying profit of €14.6 billion ($15.5 billion) in fiscal 2016.

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The overwhelming strong rise in the sales of luxury brands such as Audi and Porsche enabled the company to post 14% y-o-y increase in the operating profit. The operating profit was also broadly in line with analysts’ estimates. The profit margin increased to 6.7% in FY 16, compared with 6% in FY15. Volkswagen anticipates a profit margin of between 6% and 7% in the current fiscal year. The company’s revenue increased 1.9% y-o-y to €217.3 billion in the fiscal 2016.

The company took a charge of €4.4 billion in the final quarter of fiscal 2016. The figures were more than double the charge taken in the previous nine months. With this, the total charges taken by the company for cheating rose to €22.6 billion ($23.9 billion). In September 2015, the company admitted to rigging the engine software in 11 million cars to come clean on emission tests. In reality, the emission of pollutant nitrogen oxide was nearly 40 times the permitted level. Surprisingly, the company which owns nearly 12 global brands, including Scania and MAN, overshadowed Toyota to become the best-selling automaker in fiscal 2016. The company sold about 10.3 million vehicles, up 3.8% from the prior fiscal year.

Last Friday, on the basis of the $4.3 billion settlement reached with the US Justice Department in January, the company pleaded guilty of fraud, providing false statements, and obstruction of justice in the US District Court of Detroit. It was the first time Volkswagen pleaded guilty in any court in the world for criminal conduct. The company also agreed to spend as much as $25 billion to address the concerns of car owners and environment protection agencies. The judge Sean Cox accepted the guilty plea and set April 21st as the sentencing date. Thus, fundamentally, the stock is unlikely to move up until the judgement is announced.

Technically, the stock is trading near the lower end of Bollinger bands. Additionally, the stock has also fallen below the 50-day moving average. This underlines the prevailing weakness in the stock of Volkswagen. Considering the strong resistance on the upside, we can expect the stock to trend downwards and test the support level of about $140.

So, a put option contract can be traded to benefit from the predicted downtrend. Picking an option with a validity period of one week would be advantageous to the trader. Finally, it is also better to invest when the stock trades near $152 in the cash market.

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