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Volkswagen AG$32.01($.32)(.99%)

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 Volkswagen defies diesel and cartel scandals with strong Q3 earnings
   Friday, October 27, 2017 2:18:00 PM ET

The crisis-stricken German carmaker Volkswagen has surpassed analysts’ expectations on Friday with surprisingly strong earnings figures for the third quarter (Q3) of 2017.

Operating profit in Q3 rose by 15 percent compared to the same period last year to 4.3 billion euros (4.98 billion dollars). Despite ongoing scandals, the Wolfsburg-based firm was hereby able to benefit from successful cost reduction measures, as well as a strong rise in sales in the U.S., South America and Eastern Europe.

Even after accounting for funds put aside to deal with the legal fallout of the diesel emissions cheating scandal, Volkswagen still recorded an operating profit of 1.7 billion euros.

Chief Financial Officer Frank Witter told press that the earnings of the first nine months gave Volkswagen "a lot of confidence" with view to the full year’s results. "This is a strong foundation on which we can build", a statement by Witter read.

Traders greeted the news euphorically, leading Volkswagen shares to leap by three percent as they led the DAX stock exchange’s rally on Friday.

Analysts identified the strong Q3 earning figures as the delayed fruit of corporate management decisions during the past years. "Volkswagen is a firm that appears to need a long run-up period" said Marc-Rene Tonn of the Bank M.M. Warburg.

According to Tonn, Volkswagen was increasingly reaping the rewards of cost-saving measures, as well as attempts to become more efficient by using identical vehicle parts across the Volkswagen Group’s numerous brands. As a consequence, the flagship brand Volkswagen had doubled its operative return from 1.5 percent in Q3 2016 to 3.8 percent this year.

Arnd Ellinghorst, head of global automotive research at the investment firm Evercore ISI, pointed out that Volkswagen had already paid 17.5 billion euros in settlements related to the "dieselgate" scandal. Ellinghorst argued that the fact the firm retained net liquidity of 25.4 regardless of these costs was "simply amazing". He further voiced confidence that Volkswagen still had substantial potential to create a more efficient business.

Stefan Bauknecht, Chief Stock Analyst at Deutsche Bank’s Asset Management branch, was similarly impressed by Volkswagen’s management. "I would not have thought that the Cash-Flow would develop so strongly, especially against the background of recent costs of 2.5 billion caused by Dieselgate" Bauknecht said.

Nord LB analyst Frank Schwope warned however that the Wolfsburg-based concern may still discover an urgent need to draw down its large cash reserves if presented with additional fines in the "dieselgate" scandal.

Including fines as well as compensatory investments in electric mobility, Volkswagen has already had to set aside 25.2 billion euros in the U.S. alone to resolve the diesel emissions cheating crisis.

Nevertheless, Schwope estimated that the final cost could ultimately rise as a high as 35 billion euros. Furthermore, Volkswagen could face expensive additional anti-trust as a consequence of the European Union’s running investigation into allegations of illegal industry collusion between German carmakers during the 1990s.

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