The news of German automaker Volkswagen's use of emission-rigging software, dubbed "defeat device," in as many as 11 million cars and SUVs has been roiling the auto sector globally since it came to light on Sept. 18. In the immediate aftermath of the scandal, Volkswagen's stock lost more than 50% of its value, leading to a sharp industry-wide pullback.
The auto industry is no stranger to wrongdoings and recall controversies and their knock-on effects. Japanese carmakers Toyota and Nissan created a media storm after their cars were found to be fitted with faulty airbags. American car giant 
General Motors (GM) had to recall more than 8 million cars for faulty ignition switches. Trans-Atlantic carmaker Fiat Chrysler was fined US$105 million by U.S. authorities in a recall incident related to defective steering parts.
However, consumers tend to have a short memory that fades almost as quickly as the news cycle. For that reason, no matter how bad the damage -- financial or reputational -- corporations often bounce back and their stocks recuperate.
For opportunistic investors waiting for dips, this may be a good time to look at select auto stocks whose valuations may have become attractive, according to Morningstar equity research.
| Volkswagen AG (ADR) | ||
| Ticker | VLKPY | |
| Current yield | 5.06% | |
| Forward P/E | 0.8 | |
| Price | US$21.75 | |
| Fair value | US$42 | |
| Data as of Oct. 1, 2015 | ||
Volkswagen AG (VLKPY) is the world's leading light-vehicle manufacturer. Along with the Volkswagen brand, its portfolio of passenger cars also includes premium brands such as Audi, Bentley, Bugatti, Lamborghini, Porsche and Skoda. The company also makes commercial vehicles. The ongoing emissions scandal notwithstanding, the company has leading shares in many of the world's markets, which reduces its reliance on any one region or vehicle segment, says a Morningstar report. As well, it has a hoard of cash on its balance sheet for research, capital investment and dividend increases.
Morningstar equity analyst Richard Hilgert points out that Volkswagen enjoys premium pricing in many markets and plans to launch several new or redesigned models over the next three years. The company is pushing to increase its current 3% share of the U.S. market to about 9% by 2018, by cranking up its annual sales to about 1 million units. Although Hilgert recently lowered his fair value estimate for Volkswagen's American Depositary Receipt (ADR) to US$42 from US$ 47, fuelled by the ongoing diesel debacle and its financial ramifications, he asserted that the current weakness in its stock could be viewed as an opportunity for long-term investors to own the shares at discounted prices--provided they can handle the volatility.
| General Motors Co. | ||
| Ticker | GM | |
| Current yield | 4.3% | |
| Forward P/E | 5.9 | |
| Price | US$30.67 | |
| Fair value | US$48 | |
| Data as of Oct. 1, 2015 | ||
Detroit-based General Motors Company is the largest automaker in the United States, with a market share of about 18% as of 2014. GM and its partners produce vehicles in 30 countries. Its North American unit sells a competitive line-up under the brands Chevrolet, GMC, Buick and Cadillac. The carmaker sold nearly 10 million vehicles around the world in 2014, of which 3.5 million were sold in the U.S. -- 6% more than in 2013.
Following a massive, multi-year restructuring, Morningstar equity analyst David Whiston says GM's earnings potential is "excellent because it finally has a healthy North American unit and can focus its U.S. marketing efforts on just four brands instead of eight." The company, he says, makes products for which consumers are willing to pay more, citing the Cadillac CTS that now sells for nearly $8,000 more than last year's model. The better pricing has helped GM to be profitable at lower volume levels than in the past, he added.
| Toyota Motor Corp. (ADR) | ||
| Ticker | TM | |
| Current yield | 2.77% | |
| Forward P/E | 17.4 | |
| Price | US$118.34 | |
| Fair value | US$135 | |
| Data as of Oct. 1, 2015 | ||
Japanese auto giant Toyota Motor Corp. (TM) is the world's largest automaker whose brands include Toyota, Lexus, Scion and Hino. It sold 10.2 million vehicles globally in 2014, capturing a 46% market share in Japan and 14.5% in the United States. The firm also owns nearly 25% of Denso (a parts supplier), has a financing arm, holds ownership in telecommunications firm KDDI, and manufactures homes.
Toyota's automotive revenue jumped 8.4% year over year for the quarter ended June 30, while operating income (earnings before interest and taxes) grew 15.5%. Morningstar equity analyst David Whiston recently raised the ADR's fair value estimate to US$135 per share from US$132, based on margin expansion due to a weaker yen against the U.S. dollar and lower taxes. The carmaker registered a record US$18.1 billion in profit for the fiscal year through March 2015, up 19% from the previous year, and is expecting another 3.5% profit growth to US$18.8 billion for the next fiscal year, largely supported by growth in U.S. sales. Toyota announced in April it plans to spend about US$1 billion to build factories in Mexico and China to accelerate its push into North American and Chinese markets.
| Fiat Chrysler Automobiles NV | ||
| Ticker | FCAU | |
| Current yield | - | |
| Forward P/E | 9.9 | |
| Price | US$13.52 | |
| Fair value | US$22 | |
| Data as of Oct. 1, 2015 | ||
The world's seventh largest car company, Fiat Chrysler Automobiles (FCAU) owns an array of brands including Fiat, Chrysler, Dodge, Alfa Romeo, Ferrari and Maserati, in addition to making automotive parts (Magneti Marelli), engines (Teksid) and industrial robots (Comau).
Morningstar equity analyst Richard Hilgert says the combination of Fiat and Chrysler can achieve greater scale in components, platforms and capacity. Moreover, adds Hilgert, Fiat's ongoing expansion across fast-growing emerging markets is expected to fuel sales and provide new revenue opportunities. In view of the firm's improved sales volume and profitability, Morningstar recently raised its fair value estimate to US$22 per share. Stocks of Fiat Chrysler Automobiles, which are trading at a considerable discount to fair value, are expected to surge after Ferrari's estimated US$1 billion IPO makes its widely expected debut on the New York Stock Exchange.
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