BAYER MOTOREN WERKE AG BMWYY
October 27, 2016 - 2:09pm EST by
VI4Life
2016 2017
Price: 80.00 EPS 0 0
Shares Out. (in M): 656 P/E 8 0
Market Cap (in M): 52,000 P/FCF 0 0
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0 0

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  • Automobiles
 

Description

I think that BMW at ~€80/share is undervalued.  There are multiple ways to think about this but in a nutshell BMW has ~€20/share in net cash and has EPS of approximately ~€10, for a trailing PE of ~8x and ~6x net of cash.  BMW’s bank has earned well above its cost of capital for a long period of time and accounts for another ~€15/share of value (at book).  Excluding the cash and financial division equity, the core automotive business sells for a little over ~2x EBITDA (understanding that EBITDA is a near worthless metric with automotive companies). 

 

The preferred shares trades around ~€69 so are priced at about one turn less on each metric.  Many investors favor the preferred but since those shares will do well if the common does well I’m writing about the common here.

Alternatively, another way to think about this is that BMW has a market cap of ~€52bn and a tangible book value of ~€43bn.  The majority of this TBV consists of the bank and net cash (~€24bn), so arguably one is paying ~€28bn for the car company which has ~€19bn in tangible equity and earned ~€7-8bn in EBIT last year.  Just the brand BMW was recently valued as the 11th most valuable brand in the world, worth $41bn (Interbrand), and this is of course on the balance sheet for nothing.

All car companies trade at low multiples, as they probably should when global SAAR is already high, the traditional car business has headwinds, and the industry is cursed with terrible economics.  BMW has its own unique headwinds which are significant (punching inventory to US dealers, too many cars on the lots, Benz models more stylish, 7-series design is a bust, upcoming R&D requirements for a multitude of near-mandatory developments, Tesla competing with German luxury, etc.).  I think that these are extremely legitimate concerns and do not in any way push them aside as risks.

However, within auto OEMs I believe there is only one legitimately good business model - having some “sticker” which costs nothing but makes the car ~$3k-300k more valuable.  To varying degrees I believe the valuable stickers are Benz, BMW, Audi, Porsche, Ferrari, Tesla and a few others.  This is well known in the car business where luxury car companies produce a small minority of the cars; employ a very small proportion of the total capital; and make the large majority of the industry’s profit. 

I will not call BMW a compounder but below is their ROE since 2002, which has normally been in the mid-high teens despite having excess cash on their balance sheet.  It is un-controversial that their principal intangible asset (brand) is huge, and perhaps for this reason the business in the recent past has only traded materially below its tangible book value in 2008-2009.

ROE Since 2003
 
 
TBV/Share Since 2003
 

Price/TBV Since 2003

 
If BMW continues to trade near its TBV and it continues to earn economics vaguely in line with the past or present, the TSR from here will be quite acceptable.  Any re-rating to take into account the real value of BMW’s intangible assets and strong business qualities would be a strong kicker on top of that.
 
Disclosure

Have ownership interest in BMW at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of BMW without notice for any reason at any time.

Risks

Cyclicality, brand degradation, Tesla upper/middle-market entrance, ever-increasing R&D requirements on a low total unit volume, etc.

 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

No hard catalyst for this investment thesis except a growing value and net cash/share over time with the potential for a multiple re-rating.  

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    Description

    I think that BMW at ~€80/share is undervalued.  There are multiple ways to think about this but in a nutshell BMW has ~€20/share in net cash and has EPS of approximately ~€10, for a trailing PE of ~8x and ~6x net of cash.  BMW’s bank has earned well above its cost of capital for a long period of time and accounts for another ~€15/share of value (at book).  Excluding the cash and financial division equity, the core automotive business sells for a little over ~2x EBITDA (understanding that EBITDA is a near worthless metric with automotive companies). 

     

    The preferred shares trades around ~€69 so are priced at about one turn less on each metric.  Many investors favor the preferred but since those shares will do well if the common does well I’m writing about the common here.

    Alternatively, another way to think about this is that BMW has a market cap of ~€52bn and a tangible book value of ~€43bn.  The majority of this TBV consists of the bank and net cash (~€24bn), so arguably one is paying ~€28bn for the car company which has ~€19bn in tangible equity and earned ~€7-8bn in EBIT last year.  Just the brand BMW was recently valued as the 11th most valuable brand in the world, worth $41bn (Interbrand), and this is of course on the balance sheet for nothing.

    All car companies trade at low multiples, as they probably should when global SAAR is already high, the traditional car business has headwinds, and the industry is cursed with terrible economics.  BMW has its own unique headwinds which are significant (punching inventory to US dealers, too many cars on the lots, Benz models more stylish, 7-series design is a bust, upcoming R&D requirements for a multitude of near-mandatory developments, Tesla competing with German luxury, etc.).  I think that these are extremely legitimate concerns and do not in any way push them aside as risks.

    However, within auto OEMs I believe there is only one legitimately good business model - having some “sticker” which costs nothing but makes the car ~$3k-300k more valuable.  To varying degrees I believe the valuable stickers are Benz, BMW, Audi, Porsche, Ferrari, Tesla and a few others.  This is well known in the car business where luxury car companies produce a small minority of the cars; employ a very small proportion of the total capital; and make the large majority of the industry’s profit. 

    I will not call BMW a compounder but below is their ROE since 2002, which has normally been in the mid-high teens despite having excess cash on their balance sheet.  It is un-controversial that their principal intangible asset (brand) is huge, and perhaps for this reason the business in the recent past has only traded materially below its tangible book value in 2008-2009.

    ROE Since 2003
     
     
    TBV/Share Since 2003
     

    Price/TBV Since 2003

     
    If BMW continues to trade near its TBV and it continues to earn economics vaguely in line with the past or present, the TSR from here will be quite acceptable.  Any re-rating to take into account the real value of BMW’s intangible assets and strong business qualities would be a strong kicker on top of that.
     
    Disclosure

    Have ownership interest in BMW at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of BMW without notice for any reason at any time.

    Risks

    Cyclicality, brand degradation, Tesla upper/middle-market entrance, ever-increasing R&D requirements on a low total unit volume, etc.

     
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    No hard catalyst for this investment thesis except a growing value and net cash/share over time with the potential for a multiple re-rating.  

    Messages

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