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The present paper provides an analysis of Volkswagen AG, a world-famous car manufacturer that makes and sells cars primarily in Europe, North America, South America, and the Asia-Pacific. The company operates in four market segments, including passenger cars, commercial vehicles, financial services, and power engineering (Yahoo Finance, 2021a). I became interested in the company after the scandal in 2015 when Volkswagen admitted that it cheated on emission tests in the US using special software. I believe that the company handled the scandal really well by making a commitment to green manufacturing. Today, Volkswagen AG makes environmental and social responsibility a top priority (Volkswagen AG, 2021). This strategy allowed the company to stay profitable during the time of the pandemic when the automotive industry experienced a significant recession (Yahoo Finance, 2021a). I decided to select Volkswagen AG for the analysis, as I am thinking about investing in it.
When assessing the risks associated with investing in the company, it is crucial to consider a company’s beta. According to Vernimmen et al. (2017), beta is a measure of the volatility of a stock in comparison with the industry average. In other words, beta is a coefficient that demonstrates how much a stock price is expected to change in comparison with the market trends. Beta is calculated retrospectively by regressing the stock returns against the market returns (Vernimmen et al., 2017). Coefficients higher than 1.0 are associated with greater volatility of a stock in comparison with the stock average. Such stocks are associated with greater risks and higher returns (Vernimmen et al., 2017). Therefore, the higher the beta for a stock, the more risk-tolerant an investor should be to invest in a company.
According to Yahoo Finance (2021a), Volkswagen’s five-year beta was 1.4, which is significantly above the threshold of 1.0. Thus, investing in the company is associated with greater risks in comparison with the industry average. However, it would be unfair to say that the company is a high-risk investment. The problem with the five-year beta is that it is a retrospective view, which is hardly modified by the recent changes. According to Infront Analytics (2021), the two-year beta of the stock was 1.18, which is only somewhat above 1.0. Thus, beta analysis demonstrates that investing in Volkswagen AG is associated with slightly above-average risks.
The analysis of absolute changes in the stock prices of the company demonstrates that it was highly volatile during the past year. In particular, the minimum price of Volkswagen’s stock was $154.5, while the highest price was $480 (Yahoo Finance, 2021a). The range of the stock price change was $325.5, which was associated with significant risks. However, the changes in the stock price were associated with the COVID-19 pandemic, which had a significant impact on car sales in 2020 (Volkswagen AG, 2021). A five-year analysis demonstrates that the lowest price of the stock was $104.7 in March of 2020 (Yahoo Finance, 2021a)1. Before the COVID-19 crisis, the highest stock price of the company was $210, and the lowest price was $135 (Yahoo Finance, 2021a). Thus, it is clear that, at the moment, Volkswagen’s stock is a risky investment due to the COVID-19 crisis. As soon as the situation with the pandemic stabilizes, Volkswagen’s stocks will become a less risky investment.
When comparing Volkswagen to other companies in the industry, it becomes clear that it would be safer to invest money in Volkswagen’s competitors. The three major competitors of Volkswagen are Toyota, Ford, and General Motors. All three companies have lower five-year betas in comparison with Volkswagen AG (Yahoo Finance, 2021a; 2021b; 2021c; 2021d). In particular, Toyota’s beta is 0.64, General Motors’ beta is 1.33, and Ford’s beta is 1.14 (Yahoo Finance, 2021b; 2021c; 2021d). Thus, Volkswagen’s stock has the highest comparative risk among the company’s competitors. Toyota’s highest stock price during the past 12 months was $185.99, while its lowest price was $129.28 (Yahoo Finance, 2021b). General Motors’ highest stock price during the past year was $63.44, while its lowest price was $28.24 (Yahoo Finance, 2021c). Finally, Ford’s stock’s highest price was $16.45, while its lowest price was $6.41 (Yahoo Finance, 2021d). Thus, it is clear that Volkswagen is not the safest bet among the competitors.
If I were to decide among the four companies discussed in the present paper, I would prefer to invest in Toyota. The risks associated with the investments are minimal, as the volatility of the stock was comparatively low even during the pandemic. Since I am not an experienced investor, it would be more appropriate for me to select stocks associated with minimal risks. However, if I were an experienced investor with high tolerance to risks, it would be more appropriate for me to invest in Volkswagen, as its stock is associated with higher potential earning. The analysis demonstrates that the investment decision depends on the risk tolerance of every individual investor, as everyone needs to solve the risk/return tradeoff individually.
References
Infront Analytics. (2021). Levered/unlevered beta of Volkswagen AG. Web.
Vernimmen, P., Quiry, P., Dallocchio, M., Le, F. Y., & Salvi, A. (2017). Corporate finance: Theory and practice. John Wiley & Sons, Incorporated.
Volkswagen AG. (2021). Annual report 2020. Web.
Yahoo Finance. (2021a). Volkswagen AG. Web.
Yahoo Finance. (2021b). Toyota Motor Corporation. Web.
Yahoo Finance. (2021c). General Motors Company. Web.
Yahoo Finance. (2021d). Ford Motor Company. Web.
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