VW offers 6-yr warranty to gain US customers trust

Last month, automobile manufacturer Volkswagen AG (OTC: VLKAF) pleaded guilty of fraud in the diesel emission scandal. The German company also offered to settle disputes with car owners and environmental agencies by setting aside $25 billion for compensation.

On the basis of that news, we had forecasted a decline in the stock price and asked traders to purchase a put option valid for a week. The recommendation was issued when the stock was trading above $152 in the OTC market. A week later, the stock dropped below $150 thereby resulting in a profit from the suggestion. Last week, the stock hit a low of about $142.

On the basis of the facts mentioned below, we forecast an appreciation in the stock of Volkswagen in the days ahead.

Volkswagen is now putting huge effort to win back the trust of US customers. Ahead of the New York road show, the company has announced that it will offer a six-year, or 72,000 miles (1.15 lakh kilometers), warranty on Atlas SUV that goes for sale next month. The company also announced that Tiguan SUV, which is expected to be introduced in 2018, will carry a similar offer.

Volkswagen Group’s Chief Executive Hinrich Woebcken opined that the warranty is another step forward in addressing the needs of American customers. Woebcken also pointed out that the company’s rivals are now offering only a three-year, or 36,000 miles, warranty on similar vehicles.

The emission scandal seriously affected the sale of Volkswagen in the US. In 2015, the sales fell 5%. Last year, the number of units sold declined 8% to 323,000 vehicles.

Once the scandal was reported by media, Volkswagen suspended the sale of diesel engine vehicles all together in the US. To a certain extent, this has re-instated customers’ confidence in the company. In Q1-2017, the sales of SUVs increased 10% on y-o-y basis. Notably, the growth has come at a period when the rest of the car manufacturers are struggling to maintain their previous year’s volume.

More importantly, the company is yet to introduce the seven-seat Atlas in the market. Volkswagen has invested nearly $900 million to begin production of Atlas in the six year old factory at Chattanooga, Tennessee. Woebcken also hinted that a new mid-size SUV, to be introduced soon in the US, will also be manufactured in the same factory.

Out of the 475,000 2-liter diesel vehicles to be bought back from owners who were affected by the emission scandal, so far Volkswagen has bought back 238,000 vehicles.

The company pointed out that it has achieved its target of buying back 50% of the diesel vehicles earlier than it anticipated. Thus, considering the improvements in operation, we can expect an appreciation in the stock.

The positive reading of the Chaikin money flow indicator supports an uptrend, technically. The crossover of the MACD indicator’s main line above the signal line also confirms an increase in momentum. Thus, it would be wise to go long in the stock at this point in time.

A binary trader can purchase a call option to gain from the forecast. The option should preferably expire on 26th of April and the trade should be taken when the underlying stock of Volkswagen trades near $145 in the equity market.