​Myth Buster: A Day Late and a Dollar Short – Part II

Michael McTague |

Part I revealed how slow decision making and underfunding damaged Airbus (EADSY) and Yahoo (YHOO). This month, we look at two more intriguing situations: healthcare struggling to stay afloat under the Affordable Care Act and Volkswagen (VLKAY) racing to make a comeback from its 2015 testing scandal.

German Giant Automaker Strives for a Comeback

In a previous entry, the Myth Buster argued that Volkswagen was handling the testing crisis better than General Motors (GM) and Toyota (TM) dealt with earlier problems with brakes and safety. After the news broke, Volkswagen recognized the problem and promised to fix it. Looking forward rather than backward solves many monumental crises. What the German auto giant knew and when they knew it is a legal issue. Regaining consumer trust depends on how they correct the problem. The company says the emissions fix will be achieved, which resolves one part of the crisis: people who bought their diesels will get a repair. VW is also offering a zero down sales plan to entice consumers who are no longer enamored by the company’s reputation.

Getting out of this quandary calls for strategic action rather than marketing. Many advantages buoy up the company. Here are three reasons VW will weather the storm. First is location. Situated mid-continent in Europe’s most powerful economy, the German giant can sell across Europe and beyond, including Russia and Turkey. Both countries are gripped by economic malaise. When the situation improves, VW will be ready.

The second strategic reason is that VW’s strength lies in making smaller, less opulent vehicles. Ford (F) and General Motors compete well against VW, but as China, Russia and India open up economically, Volkswagen holds an edge with smaller, efficient vehicles. Market observers will note that in Europe and emerging markets both American giants offer different models from their top US brands. These include Buick Century, Sail, Edge SUV and RS Focus. Marketing has its limits. Consumers recognize small vehicle expertise.

The third strategic reason is VW’s success in the US. Defeating the UAW in a contentious election at their Tennessee plant positions them well to move forward aggressively. While GM and Ford remain locked in to expensive union contracts, Honda (HMC), Toyota and VW manufacture in open-shop states. Market watchers will also note that the open shop trend is increasing: Twenty-five states are now open-shop. Imagine what GM and Ford would give to open a plant in Mississippi!

All of these major auto companies are global powerhouses, but GM and Ford have not hit any grand slams recently. The dollar is rising against the euro and China and Russia, where the giants have put so much effort, are stuck in economic quicksand. This also gives VW an edge.

Since October when VW’s market cap slipped to $55 billion (Oct. 20), they have gained back nearly $8 billion. Still well below the $127 billion of March, 2015, the Beetle maker inches toward success.

Healthcare Profits Sag

United Health Care (UNH) announced it may pull out of Obamacare shortly before the end of 2015, pulling down healthcare stocks. United Health Care blew the whistle on the flaws in the plan. Other major healthcare providers may follow.

All investors are on to the weak planning that led to UNH’s announcement. The designers failed to follow the rules on how to make an insurance plan work. A sound plan spreads the risk, piloting healthy people to sign up. Without meaning to pile on, setting up a successful insurance model is no secret. The Health Maintenance Organizations (HMOs) figured out how to entice younger, healthier people away from the traditional health care providers. Blue Cross was left with older, less healthy and more expensive participants. According to The Huffington Post, the Affordable Care enrollment goal for 2015 was nine million. About seven million signed up through October. Earlier projections called for more than twenty million to join. Analysis of success or failure is full of political commentary, but the plan did not achieve the critical mass needed to make an insurance model work.

Failing to win over a larger pool of participants leaves two options. Premiums or deductibles will have to rise or reimbursements fall to keep insurance providers in the plan. Participants may drop out. The second option mirrors Fannie Mae and Freddie Mac, which operate as quasi-independent organizations – known as government sponsored entities. The government may defray some portion of the premium cost. If they defray enough of the cost, more participants may sign on. The second option shifts the cost to the taxpayer.

The myth proves unforgiving for those who ignore how insurance works. There are simply too few healthy, young people enrolled. Since people cannot be turned down for pre-existing conditions, the risk factor is too high for a successful plan.

This myth has shown itself a robust test of strategic prowess. Poor planning hurts Obamacare. Poor execution damages Airbus’s previous trajectory. Volkswagen’s quick action appears to be slowing the downward spiral thanks to strategic opportunities. For Yahoo, let’s just say they are more than one day late and more than a few billion dollars short. Next month, we will look at more absorbing tales that make us think about our strongest-held assumptions.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
UNH UnitedHealth Group Incorporated (DE) 160.73 -0.21 -0.13 3,480,032
TM Toyota Motor Corporation 116.83 -0.94 -0.80 190,881
GM General Motors Company 35.03 -1.02 -2.83 22,753,452
F Ford Motor Company 12.24 -0.19 -1.53 38,690,435
YHOO Yahoo! Inc. 40.07 0.44 1.11 8,588,644

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