Why Worst-Case Scenario For Volkswagen Might Be A $7.4 Billion Fine, Not $18 Billion

Bernstein's Max Warburton dispelled the myth Monday that Volkswagen's fine could reach $18 billion – a cost that corresponds with the $37,500 maximum per car fine multiplied by 482,000 cars.

After digging into the EPA's methodology, Warburton said that that fine only applies to the first 10 cars. "Subsequent vehicles would be fined much, much smaller amounts," Warburton suggested.

Fine Estimate Doesn't Include Other Financial Risks

Despite the $7.4 billion estimate, Warburton cautioned that Volkswagen has "all sorts of other financial risks." Those include risks of state-level fines, fines in other regions and a loss of sales, margins and profitability in the United States and, potentially, Europe. Therefore, Bernstein suggested that investors should "brace for significant financial damage."

Related Link: It's Not Over For Volkswagen; Deutsche Bank Downgrades "Polluted" Stock

Warburton also asked whether Volkswagen would be forced to raise capital given the size of a fine, which would likely be more than 10 percent of its current $53 billion market cap. Bernstein said that if the fines exceed 10 billion euros – or $12 billion – a capital raise is "highly likely." Otherwise, the company is likely to maintain its "very conservative approach to financing."

Last week, Warburton tackled eight other questions that investors should know about Volkswagen. At the moment, the analyst has reiterated the firm's Overweight stance on the stock.

Image Credit: Public Domain