The Volkswagen Scandal and How it Could Affect Your Portfolio

Why investors in these stocks need to worry: Magna International Inc. (TSX:MG)(NYSE:MGA), AutoCanada Inc. (TSX:ACQ), Martinrea International Inc. (TSX:MRE), and Linamar Corporation (TSX:LNR).

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You’re probably glued to updates about the Volkswagen scandal if you’re a curious soul like me. After all, it’s hard to believe how an auto giant could risk messing with emission tests in its race to the top. Volkswagen has reportedly admitted to having installed software intended to cheat on emission tests in 11 million cars globally, sending shock waves through the industry.

While Volkswagen shareholders must be watching in horror as their shares bleed, your portfolio could also feel the repercussions if you’re invested in companies that are associated with Volkswagen in any way, such as its suppliers and dealers. Here are some stocks that could suffer in the wake of the scandal.

Magna International Inc. (TSX:MG)(NYSE:MGA)

Magna International could perhaps take the biggest hit among the companies discussed here as Volkswagen counts among its six largest customers: In 2014, Volkswagen contributed nearly 11%, or US$4.1 billion, to Magna’s total revenue.

Ironically, just this past August Volkswagen listed Magna as one of its “Future Automotive Supply Tracks” strategic partner, with plans to strengthen its collaboration with the auto supplier in the near future. All that has gone up in smoke.

Also, Magna generated nearly 27% of its total sales from Europe last year. Considering that Volkswagen currently dominates a quarter of the European passenger car market, Magna’s sales from the region could take a substantial hit.

What’s worrisome is that Magna already downgraded its production sales outlook from Europe during its last earnings release, projecting to generate US$6.8-7.2 billion in sales for the year versus its earlier projection of US$8.8 billion in sales. While much of the revised outlook came on the back of currency headwinds, the Volkswagen issue is a double whammy.

AutoCanada Inc. (TSX:ACQ)

This automobile dealerships company must be stuck with hundreds of Volkswagen cars that suddenly have no takers. A deeper look into AutoCanada’s financials reveals that it currently operates six Volkswagen dealerships in Canada, or 12% of its total dealership count in the nation.

More notably, one of AutoCanada’s key growth projects in progress is the setting up of a new 45,000 square feet Volkswagen dealership at Sherwood Park, Alberta. AutoCanada plans to complete construction at the dealership by early next year, and have planned the “potential of 800 new vehicles annually” within two to three years of commencing operations.

While AutoCanada expects VW to compensate dealers, it’s nothing but a wait-and-see situation for now. More importantly, the Sherwood project’s future now hangs in the balance, and that could deal AutoCanada a big blow.

Remember, AutoCanada already signaled a slowdown in sales during its last quarterly earnings release thanks to low oil prices and low consumer confidence. The company talked about excess inventories—an issue that could assume bigger proportions as sales of Volkswagen vehicles come to a standstill. All this is bound to have repercussions on AutoCanada’s sales and profits and its stock price.

Martinrea International Inc. (TSX:MRE) and Linamar Corporation (TSX:LNR)

Both Martinrea and Linamar supply parts and components to Volkswagen. The companies do not provide a detailed breakdown of revenue per customer, but Linamar reportedly derives less than 5% of its sales from VW, while Financial Post pegs Martinrea’s exposure to VW at less than 2% of sales.

While that may not be much, even a tiny exposure could hurt the companies, and it’s still too early to say by how much. It’s also worth noting that both Martinrea and Linamar have substantial exposure to Europe. Martinrea generated 19% sales from the region, while Linamar derived 14% of its automotive sales from Europe last year.

Why is that important? Because the VW scandal could have ripple effects, landing other auto companies under scrutiny. Earlier this month, the International Council on Clean Transportation reported 32 European diesel vehicles to be emitting nitrogen oxide emissions double the regulatory limit.

Needless to say, suppliers and dealers in the auto industry could find themselves in a fix if on-road tests continue to spring up shocks that compel regulators across the globe to swing to action.

Should you invest $1,000 in Magna International right now?

Before you buy stock in Magna International, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Magna International wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $17,733.03!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 36 percentage points since 2013*.

See the Top Stocks * Returns as of 12/26/24

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Investing

four people hold happy emoji masks
Bank Stocks

Is BNS Stock a Buy, Sell, or Hold for 2025?

Bank of Nova Scotia is up more than 20% in 2024. Are more gains on the way?

Read more »

Pile of Canadian dollar bills in various denominations
Investing

Here Are My Top TSX Stocks to Buy Right Now

If you’re looking for some top TSX stocks to buy right now, here are two of my top recommendations.

Read more »

A airplane sits on a runway.
Stocks for Beginners

Is AC Stock a Buy Now?

Despite short-term challenges, Air Canada’s improving long-term growth potential makes it an attractive stock to buy now.

Read more »

grow money, wealth build
Dividend Stocks

2 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These ultra-high-yield dividend stocks have resilient payouts, making them reliable investments to generate worry-free passive income.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

Maximizing Returns Within Your 2025 TFSA Contribution Room

ETFs like the iShares S&P/TSX 60 Index Fund (TSX:XIU) can be great TFSA holdings.

Read more »

hand stacks coins
Dividend Stocks

2 Dividend Stocks to Double Up On Right Now

These two dividend stocks could boost your passive income and strengthen your investment portfolio.

Read more »

A worker uses a double monitor computer screen in an office.
Tech Stocks

The Ultimate Software Stock to Buy With $500 Right Now

Here's why OpenText (TSX:OTEX) looks like a top buying opportunity for growth investors looking to put their next $500 to…

Read more »

Pumps await a car for fueling at a gas and diesel station.
Investing

Is Couche-Tard Stock a Buy Now?

Couche-Tard stock is worth consideration for long-term investors, especially on dips.

Read more »