Description

CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.

Investment Overview

I believe BMW is potentially an attractive risk/reward opportunity at current price levels. The key question is whether BMW can successfully transition an increasing portion of its business from selling mostly internal combustion engine (ICE) cars to electric vehicles (EV) over the coming years and possibly, longer term, whether it has a sustainable future in a driverless car era. Today, the market is pricing the odds of a successful transition to EVs (and driverless thereafter) as low. As a result of the market’s skepticism, the stock trades at 0.8x tangible book value (TBV), ~5x 2023E consensus earnings per share (EPS) and sports a ~7.8% dividend yield as of 9/16/22.[i]

BMW has arguably one of the best luxury brands in the auto industry and owns the super-luxury brand, Rolls-Royce. It has not been sitting still transitioning its business. In 2013 it launched the i3 and i8 and more recently the all-electric iX, i3 and i7 models with plans to roll-out more EV models in the coming years. Its goals by 2030 is to have EV models for all market segments and account for at least 50% of its revenue compared to 16% in the first half of 2022.[ii]

On a Price/TBV basis, BMW trades at a ~10%-20% discount to the likes of Mercedes-Benz and Volkswagen.[iii] I believe these are the best comps for BMW given similar brand strength, auto business mix targeting mass, affordable luxury, luxury, and super-luxury as well as captive finance subsidiaries.

Over the past 10 years, BMW has traded at an average P/TBV of ~1.5x and ~8.3x forward EPS.[iv] Only in the depths of the COVID-19 pandemic has BMW traded at a lower multiple than where it is now. In fact, VIC member hawkeye901 wrote BMW up on 5/27/20 and provided an update last month so please reference those as well for additional information.

Over the past 9.5 years BMW has grown its EPS at a 14.0% compound annual growth rate (CAGR) and TBV/share at a 9.7% CAGR all while paying out ~€30/share in dividends based on a 30%-40% target payout ratio.

Valuation/Expected Return: Besides looking at TBV and EPS, another way to frame valuation is looking at the company on a sum-of-the-parts basis, however theoretical it might be. The three big pieces are its core BMW auto operations, its captive finance subsidiary, and super-luxury Rolls-Royce business.

Rolls-Royce: In 2021, units sold grew nearly 50% to 5,586—the most annual units ever sold. In the first half of 2022, it grew units sold by 6.8% to 3,191. In 10 years, the company expects all models sold to be entirely EV.[v] While BMW does not give out a ton of information on the business in its quarterly and annual reports, based on the average retail price listed of each model sold, total revenue is ~€2 billion. Using Ferrari (NYSE: RACE) as the closest comp given similarly high price per vehicle sold, applying a comparable mid-20s operating margin and price/earnings (P/E) multiple would equate to a ~€15B value for the business.[vi] For this value to be realized, it would likely need to spin out or sell off (at least a portion) of the business. I wouldn’t be surprised if there were several interested parties from a sovereign wealth fund to a luxury goods company.

Core BMW: Backing out the estimated ~€0.5B in operating profit from Rolls-Royce would leave ~€8.0B of operating profit or ~€7.0B after-tax. Over the past 10 years it grew revenue at a 4.7% CAGR and operating profit at a 1.6% CAGR. For example, applying Ford’s (NYSE:F) 7.4x forward P/E multiple (a 10%+ discount to BMW’s 10-year average P/E) equates to ~€52B in value.[vii]

One thing worth noting is that this business is arguably sitting with ~€7B of excess cash. Having excess liquidity might be the right move if the U.S. and Europe are heading into a recession. And BMW might want this capital cushion to help transition its auto production to increasingly EVs in the coming years. As of 6/30/22, it had ~€18.4B of cash & cash equivalents (against ~€104.5B in LTM auto revenue) compared to ~€11.2B as of 6/30/21 (compared to ~€95.7B in LTM auto revenue).[viii] If we look back a decade ago, it had ~€6.4B of cash & cash equivalents against ~€65.7B in LTM auto revenue.[ix]

Financial Services: Over the past 10 years this revenue increased at a 6.1% CAGR while its income grew at a 9.7% CAGR.[x] Additionally, its equity grew from ~€7.1B to ~€18.0B or a CAGR of 9.7% over this period.[xi] The finance subsidiary is 8.5-9.0x levered and produces a mid-teens ROE.[xii] To be conservative, I value it at TBV of ~€18B. A close comp is Ally Financial (NYSE: ALLY), which is the old General Motors Acceptance Corporation (GMAC). It is levered over 13x, has a mid-teens ROE and trades at just under TBV.[xiii]

Add it all up and you get a sum-of-the-parts value of ~€85B. If you want to simply apply its average 10-year P/E multiple of 8.3x to 2023E consensus EPS gets you to ~€78B. Lastly if you apply its average 10-year P/TBV of ~1.5x gets you to ~€93B. These values compare to a market capitalization of ~€49B. Using the lowest value of ~€78B plus expected dividends translates into upside potential of ~70% over the next 12-18 months.

Risks: BMW does not execute on its EV business transition and loses market share to the likes of Tesla, etc.

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm.  The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herin.

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

The author or his or her respective employer or employer’s clients, affiliates, officers, managers and directors, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaims any liability for investment losses that you may incur under any circumstances.

The author does not hold a position with the issuer of the Security such as employment, directorship, or consultancy.

[i] Capital IQ as of 9/16/22

[ii] BMW’s 1H’22 Earnings Call Presentation (8/3/22)

[iii] Capital IQ as of 9/16/22

[iv] Capital IQ as of 9/16/22

[v] BMW’s 1H’22 Earnings Call Presentation (8/3/22)

[vi] Capital IQ as of 9/16/22

[vii] Capital IQ as of 9/16/22 

[viii] BMW Financial Statements 6/30/21

[ix] BMW Financial Statements 6/30/12

[x] Capital IQ as of 9/16/22

[xi] Capital IQ as of 9/16/22

[xii] BMW Financial Statements as of 6/30/22

[xiii] Capital IQ as of 9/16/22

Catalyst

Time and/or a positive announcement of a (partial) sale or spin-off of the Rolls-Royce business akin to what Volkswagen is doing with Porsche.