BMW: A Shinning Brand – Seeking Alpha
I. Investment thesis
A family business with a superb brand, a well-diversified market, and an excellent valuation: BMW (OTCPK:BMWYY) is one of those companies you want to own.
II.- The company
The BMW Group is one of the major world manufacturers of premium vehicles. It began operations back in 1916 and has been producing automobiles since 1928. BMW is divided into three main divisions: automobiles, motorbikes and financial services. The automobile division operates three brands, BMW, Mini and Rolls-Royce, all of them brands with a high prestige.
BMW is a family business, something we value very much.
46,7% of the company is the property of the Quandt family, in particular of Stefan Quandt and Susanne Klatten, who are siblings. The remaining shares are partly in the hands of institutional investors (near 40%) and partly in the hands of minority shareholders.
In our opinion, this an important point as it assures a long-term vision in the management of the company.
(Source BMW group)
IV.- BMW, a powerful brand
Another important point to stress is that BMW is a brand with a very high prestige, which provides a competitive advantage over its competitors. A reputable brand protects both, the market share and the profits of the company. It is a moat.
The BMW group is ranked in 12th position in the “Rep Trak100™” list, being the second most reputable company in Latin America and the 8th in Europe. Moreover, Rolls-Royce occupies post number nine in the global list.
BMW is the first company of car manufacturers, being Daimler (OTCPK:DDAIF) in post 27. Then it follows Toyota (TM), in post 34, Honda (HMC) in number 48, Ford (F) in number 69, Nissan (OTCPK:NSANF) in post 80, PSA in number 85, Renault (OTC:RNSDF) in post 87, General Motors (GM) in post 96, Hyundai (OTC:HYMLF) in post 99 and Volkswagen (OTCPK:VLKAY) in post 100.
In the BrandZ list, BMW occupies post 33, being the second car manufacturer after Toyota, which occupies post 28. Then, the following manufacturer is Mercedes-Benz in post 39, Honda in post 74, Ford in post 75 and Nissan in post 92.
As we have already said, the high prestige of the brand provides BMW a competitive advantage, protecting its market share, their profits and, very important, the investor’s benefits.
V.- Sales diversification
Another positive aspect of BMW is that is well diversified. The company operates worldwide, with sales in all major markets. Europe represents the most important share of sales, with a 46% of the total, followed by China, with a share of 22% and increasing strongly.
Currently, BMW occupies the 13th position in global sales, just second after Daimler in the premium segment.
(Source Jato Dynamics)
Also BMW in one of the manufacturers presenting higher rate of growth, with a year-to-year 6%.
VI.- BMW, the strategy
BMW has established a strategy that we think goes in the right direction.
BMW provides the conventional premium offer, while also betting on new technologies. Both, the electric motorization and the autonomous driving, are in the BMW focus.
It has added to their offer Battery Electric Vehicles and Hybrids. Especially the latter is a technology we think it is very promising. In the last three years BMW has added 6 plug-in hybrids to the offer, and four more will follow in the next two years.
Also, it has added some offer in the BEV segment, but lower, with only two models available. As we have already commented, the hybrid seems a more interesting technology than the EVs, technology that we think is still immature for a mass implantation, so the approach followed by BMW seems the most appropriated for us.
Moreover, BMW is interested in increasing the automation of the driving in its fleet, with the final objective to make it completely autonomous. We also like the approach.
VII.- China: room to grow
In the last decade, BMW has had a very important growth in China, manufacturing an important share of their vehicles there. It has multiplied by more than 14 times the number of units sold in China, and now it is the most important market for BMW. Even after this impressive surge, the sales are growing at two digit pace. There is no doubt that China will be the market where the sales will grow more in the future. BMW is solidly implanted in China and it will take profit of it.
The Free Cash Flow of the last eight years has been above the target fixed by BMW, €3 billions. If we estimate €3.5 billions of FCF for the next year, we can make a quick valuation. We suppose that the FCF will grow at 2% and that the weighted average cost of capital of BMW will be 7% (Assuming an increase of interest rates). Then, the value that we obtain for BMW is €87.5 billion, or a 52% over the current market capitalization, which is €55 billion.
(Source: Author Calculation)
Compared with a set of peers, BMW also obtain a good valuation. The PE is lower than the median of the peers, and the rest of parameters evaluated (PS, PB, debt and dividend) are similar.
However, we should take into account that the reputation of the BMW brand gives a plus, so we consider that it sells at a discount with respect its peers.
The debt seems in a little bit high, but if we discount all the financial assets that BMW owns, then, it results that the net debt is a mere €2 billion or a 5% of the equity. Nothing.
The car industry is a cyclical business, and this is the major risk that BMW faces. The low ratios of the sector would indicate that a change in the cycle will take place soon. A recession in any of the major markets will bring a significant decrease in the sales, and therefore in the benefits.
We would see it as an opportunity to increase the position in BMW.
BMW has significant advantages:
- It is one of the most reputable companies in the world.
- It is a family business.
- The valuation and the financial situation are great.
- The net debt is practically non-existent.
- It is well positioned in the new developments: electric motorization and autonomous drive.
- It is well diversified globally, being solidly implanted in the market that we think will grow the more, China.
- It sells at a similar ratio that their peers, so the value of the brand is completely discounted.
In our opinion BMW is a must.
Disclosure: I am/we are long BMWYY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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