The German auto sector has historically been the showcase of German industrial and technological prowess. That was until Volkswagen shocked the world, when evidence emerged that they were using special software to cheat on emissions data.
The Volkswagen saga is old enough to stop being a priority, but two years have done nothing to dampen concern about emissions; rather the focus has intensified. Doubts continue to mount whether politicians have the will to tackle this important industry. This is understandable, if not acceptable. The German car industry provides over 20% of the country’s income and political leaders have been cosying up with the industry for years. It is not by any means a mistake that laboratory and the real world emissions test are incomparable.
The laboratory test was designed when air-conditioning, window and seat heating and many other electrical devices were not common. In addition, carmakers are allowed to remove windscreen wipers, wing mirrors, spare wheels, and even tape up doors to reduce drag. The EU is currently working on a set of new rules, but in the meantime, news continues to emerge of unacceptable behaviour by the industry. In all fairness, it is probably not only the industry that is at fault.
Just try driving through Marsa in the morning and you will be lucky not to get buckets of NOx or whatever black fumes in your lungs from the trucks, vans and modified diesel cars. How many really care, and is anything really being done about it? So the argument is not only about jobs and the willingness of politicians to stand up, but also about the consumer compromising long-term health issues for sub-par enforcement.
This pressure has created an uncertain environment for the car industry, resulting in the top three German automakers trading at a low price to earnings levels. It is my opinion that, at these levels, the auto sector is trading well below its fair values. Add to this the sell-off due to North Korean crisis and these stock suddenly appear to be dead cheap.
As a top pick, I would suggest BMW because the company has a coherent and well-executed strategy that is expected to propel it into the future. The strategy is focusing on the shift into electric mobility. BMW is also launching the largest model offensive in the group’s history. This includes a freshened 2 series, a redesigned X3, an all-new 6 series in 2017, a redesigned 3 series, 5 series and 7 series in 2018, plus an all-new X3 and X2, and an all-new 1 series and X7 in 2019. Moreover, a series of electrified vehicles is also in the pipeline.
BMW is also launching the largest model offensive in the group’s history. This includes a freshened 2 series, a redesigned X3, an all-new 6 series in 2017, a redesigned 3 series, 5 series and 7 series in 2018, plus an all-new X3 and X2, and an all-new 1 series and X7 in 2019. Moreover, a series of electrified vehicles is also in the pipeline.
BMW is currently delivering an extremely solid year despite a relatively challenging North American car market, profiting from the strength of the European car market, as well as the full-year impact of the launch of the brand new BMW 5 series (G30) since February 2017.
BMW is trading at the low end historically due to the fact that earnings are at a cyclical peak in a late cycle environment, and earnings are at risk from structural disruption, as the industry deals with emission standards and the move towards electric drivetrains. However, this may be a one-off entry opportunity.
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are 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.