BMW Is Definitely Worth Considering – Seeking Alpha
BMW (OTCPK:BMWYY) recently reported its Q1 2017 results, posting a first quarter all-time high for automobile sales with 587,237 vehicles sold and a massive 26.9% increase in pre-tax profit to €3.005 billion. Vehicle registrations in Europe were very strong; up 8.1%, but the US market fell 1.5%, and we learnt in April’s sales report that sales were 9.3% down on the same period last year. “Tight supply of key models had a strong effect in April”, said Bernhard Kuhnt, president and CEO of BMW North America.
Despite a very recent US sales slump, the stock has had a good run since the Q1 earnings report; rising from under $29/share at the beginning of April to almost $33 at the time of writing. I wrote about BMW six months ago with the stock at $28.50 and pitched it as an alternative to Ford (NYSE:F) and General Motors (NYSE:GM), but with the stock up almost 15% since then and with recent US sales numbers looking bleak at best, is it time to take the profit and run?
BMW sold 82,169 vehicles in the USA in Q1, representing 14% of BMW’s total sales, so a decline is something to note but not catastrophic to the company’s top and bottom lines. BMW announced that it expects to produce 3 million vehicles annually by 2020, which would represent a 26.7% increase on 2016’s 2,367,603 units. The US car market is actually predicted to fall in 2017 by around 0.9% to 17.4 million units, so a fall for the first four months of 2017 shouldn’t be of too much concern, despite the fact that BMW’s sales have fallen by more than 0.9%.
A slight hiccup in US vehicle sales is likely to be the result of rising interest rates and subsequent unattractive car finance packages. However, this problem will be short lived, and double-digit growth in China will more than remedy the problem.
The stock itself is very cheap at 8.5x earnings, and a 3.7% dividend yield is very attractive indeed, but it must be said that those numbers are no more attractive than Ford or GM. All automotive stocks (other than Tesla (NASDAQ:TSLA), obviously) have been stuck in a value trap for far too long, and on a P/E and yield basis alone, there is very little to choose between them.
The company expects to sell 3 million vehicles by the end of 2020, but the majority of growth is expected to come from China. This is an issue for BMW, as every BMW sold in China is produced by a company called BMW Brilliance Ltd., of which BMW only owns 50%. Therefore, double-digit sales growth in China is the same as single-digit growth anywhere else, and all of a sudden, nearly 27% sales growth in three years doesn’t seem quite as impressive as it did at first.
Having said that, many automakers have similar deals in Asia, with Jaguar Land Rover and Chery being a prime example. BMW will certainly grow sales over the coming years, and although the partnership will dampen revenue growth, the stock is still very cheap, and the yield is way above the market average.
In this situation, I like to invest in the company that I think has the strongest brand and a superior portfolio of products, and on that front, BMW is miles ahead of the competition. The BMW brand will always attract a certain type of buyer, and the new generation of ‘M’ cars are not just faster and more efficient than before, they are in a completely different league to what is offered by their American rivals, especially over here in Europe.
BMW has the right balance of efficient new diesels and hybrids for the environmentally conscious driver and exciting twin-turbo 3-liter petrol engines for those more interested in getting from A to B as quickly as possible. The company does all of this while maintaining healthy profit margins, without the compromise of lower build quality. In terms of valuation, dividends, and margins, BMW does everything the big American automakers do, but with the benefit of establishing a moat, built around a great brand and superior build quality. For that reason, BMW is my preferred automaker to own for the long term.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BMWYY over the next 72 hours.
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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