Updated from 10:08 a.m. to include news Volkswagen CEO stepped down in the sixth paragraph.
NEW YORK (TheStreet) -- As if Volkswagen didn't have enough problems on its hands, now it has to deal with this.
Deutsche Bank dropped its rating on Volkswagen (VLKAY) on Wednesday to "hold" from "buy," lowering its price target to o €130 (about $145) from €260 (about $289) as the storm surrounding the German automaker continues to brew and uncertainty pervades. Calling the company a "polluted investment case" and "an investor's nightmare," analysts at Deutsch Bank cut their earnings per share estimates over 2015-2017 by up to 35%.
"After VW lost c. €30bn of its market value in 2 days, it might strike as a buying opportunity," analyst Tim Rokossa wrote. "However, we stress that the full magnitude of the emission scandal is likely to remain uncertain for much longer."
Volkswagen came under attack on Friday for having deliberately misled regulators by equipping engines in its diesel vehicles with software that allows VW cars to reduce emissions in testing. Initially, 500,000 vehicles in the U.S. were targeted, but since then, that number has climbed to 11 million vehicles worldwide -- and according to Deutsche Bank, it could get worse. "History has shown that with recalls the first 'confessions' are rarely the end of it," Rokossa wrote.
Volkswagen's senior board members are meeting Wednesday to discuss the company's fate and that of its CEO, Martin Winterkorn.
(Update: Winterkorn announced mid-Wednesday he was stepping down.)
Deutsche Bank's current base case is that VW will face about €5 billion in legal fees and residual impairment, though it says it is impossible reasonably estimate legal fines that will be "impossible to quantify and potentially remain a topic for years." The United States Environmental Protection Agency has already suggested that in the U.S. alone, VW could face charges of $37,500 per vehicle, meaning a maximum fine of $18 billion.
Deutsche Bank says the automaker's legal fees will be "very painful, but manageable." In the first half of the year, VW was about €21 billion net cash and will receive another €3 billion from Suziki. Assuming the €5 billion estimated cash outflow and the €6.5 billion Volkswagen has said it will set aside to address the issue, Rokossa wrote that VW would still be left at €13 billion net cash -- its level to maintain credit rating.
However, further regional claims, private lawsuits and dealer compensation are likely to be incurred, and as analysts point out, the numbers can add up quickly. "Overall, we think the legal fees will be painful but likely manageable as the effect is usually spread over several years," they wrote, adding they see potential for another €5 billion of non-core disposals.
The key concern, instead, is tied to the mid-term impact on Volkswagen's operations and, according to Deutsche Bank, is even harder to estimate.
Analysts believe reputational damage is likely to cause pricing pressure and have taken a more cautious growth outlook for both Volkswagen and Audi. Much of their buy case had been based on cost cuts, but the rising costs for diesel cars will likely offset most of the impact.
The overarching theme of Deutsche Bank's take on Volkswagen is uncertainty, as the story on the automaker continues to unfold and more law suits, management changes and even equity measures remain unanswered questions. "We think legal and especially operational uncertainty will continue to weight on the stock which makes pinpointing a 'fair level' a nearly impossible task and the unquantifiable risk might prohibit several investors to take a new position," Rokossa wrote.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.