Last week BMW reported a solid set of results. The company reported margins in the auto division of 9.7% ahead of expectations (and close to the high end of the expected range 8-10%). This was mainly due to an improved contribution from the finance division. BMW is now seeing a pick-up in sales in China and helping to mitigate the challenging North American market.
The negatives out of the results include top line growth of the auto division slowing down and lower pricing power, year on year. Having said this, going forward, auto revenues are now expected to see a “solid” rather than a “slight” increase.
We think BMW is well geared to continue benefitting in this market.
Valuation
We have a price target of €94 on BMW. The shares are trading on a trailing P/E ratio of 6.83x, which is at a big discount to that of the market. The Euro Stoxx 50 is trading on a P/E ratio of 18.27x. The discount is a result of the sector being put under pressure, due to the allegations concerning the emission scandal on auto stocks. We think that a lot of the negativity is priced in. Looking at historical ratios, BMW traded on an average P/E of 9.43x, which is much higher than that of today.
We believe that at this price, auto stocks are looking more and more attractive. BMW is now trading on a forecasted earnings yield (2018) of 13% compared to the Euro Stoxx 50, which is trading on a forecasted earnings yield of 7%. We believe the gap between the two is too large and we should see further convergence in the months ahead.
Moreover, BMW is setting its sights on the future, with plans to boost spending on electric cars and self-driving features to move on from the German auto industry’s diesel woes.
Rationale for investing in BMW
· A blue chip company with management focused on innovation and driving growth
· A lot of expenditure in R&D, though will pay off in the future as the sector shifts towards electric cars. BMW is at the forefront of this technology
· Trading on a trailing P/E ratio of 6.83x, which is at a big discount to that of the market. The Euro Stoxx 50 is trading on a P/E ratio of 18.27x
· If the shares had to trade on their historic P/E average (9.43x) and assuming 2018 earnings consensus forecasts do come in as planned, the share price should move closer towards €100. Given the uncertainties surrounding the sector, we are discounting this price target to €94. However, there continues to be considerable potential upside in the stock
· The shares are trading on an attractive dividend yield of 4.40%, which is very attractive
Conclusion
With our positive economic outlook on the European economy in particular, we believe BMW is well positioned to benefit from future growth. We believe the shares should be a core holding in a well-diversified portfolio.
About BMW
Bayerische Motoren Werke AG; German for Bavarian, usually known under its abbreviation BMW, is a German luxury vehicle, motorcycle, and engine manufacturing company founded in 1916. It is one of the best-selling luxury automakers in the world. The company is a component of the Euro Stoxx 50 stock market index.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.