BMW Group BMW3
November 13, 2012 - 11:12am EST by
2012 2013
Price: 44.00 EPS $7.90 $8.50
Shares Out. (in M): 655 P/E 5.6x 5.1x
Market Cap (in $M): 28,820 P/FCF 8.3x 7.9x
Net Debt (in $M): -13,025 EBIT 8,450 8,900
TEV (in $M): 15,725 TEV/EBIT 1.9x 1.7x

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  • Automobiles
  • Manufacturer
  • Germany
  • Brand
  • Dividend yield


BMW is well known for the quality automobiles and motorcycles it produces.
I've read more than one research paper where BMW's merits as a "luxury brand" were discussed. I have no intelligent answer as to weather this is a luxury company or not. My personal opinion is that given the natural cyclicality of any and all car manufacturers, even though BMW is certainly in the "premium" segment it lacks the defensive characteristics that a true luxury brand might have.
Having said this, BMW is without doubt well established as a premium car manufacturer and I do believe that it's consistent profitability and higher margins vis-a-vis global competitors should warrant a premium valuation to the sector. It's automobile brands Mini, BMW and Rolls Royce are all well established in their corresponding categories.
The opportunity here described applies when purchasing BMW's preferred, non-voting shares which currently trade at a 30% discount to the ordinary shares even though they both have the same economic rights.
The company just published an excellent presentation (Nov 2012), which I encourage anyone interested in further examining this business to read.
Furthermore, the company's annual reports are particularly insightfull and well written. Amply discussing the company's oportunities without neglecting to talk about the challenges that it faces ahead.
After reading  their annuals you get a sense of the management who's in charge of this company and digging further it becomes evident that this family-owned business without doubt runs BMW with the long term in mind, seeks to add value for sharelholders through time and most importantly, has a track record of having done just that in the past.
The 2011 annual:
And the 2010 annual report:
I prefer straight to the point ideas where the thesis is laid out flat, the opportunity for the mispricing explained and where an ample arread of information is available for me to do my own research.
 Thus I will do my best to layout the core points of this investment thesis and let you delve further into the business per-se and conduct your research.
BMW is both a very profitable car and motorcycle manufacturer and a financial services company.
The company's automobile business operates with average ROIC's of 45% while the financial services division ROE is just around 21%.
So the first question one would ask is the current state of the world automobile market. The world can still produce roughly 80 million cars every year while today's demand is for about 60 million.
In the US although auto sales have rebounded, the current state of demand for 12-14 million vehicles is still far away from the 18 million cars we used to produce.
Europe buys around 14 million cars and falling with no clear stabilization so far. (Italy by far being the most hit market, followed by Spain)
Whereas China has become the largest car market in the world with roughly 18 million vehicles production. Estimates are that China will grow to be a 32 million market by 2020.
India, the south east Asian economies, Russia, the Middle east and Latam (specially Brazil and Mexico), all are growing markets as well.
Thus emerging economies growth are more than compensating for the developed markets decline in the global landscape of automobile production.
The company's strong brand has made it possible for BMW to grow sales from €55 bn in 2007 (the last peak), to roughly €70 bn today while basically doubling ebit and net profit. Meaning both growth and margin expansion. I see no reason for this not continuing.
As for growth opportunities, it is my belief the company is very well positioned to take advantage of them.
Take China as an example- according to Global Insight, China's premium segment will have the highest worldwide CAGR of 11.3% in the 2011-2020 period. This of course due to higher per capita income, a fast growing upper middle class and the country's urbanization (according to McKinsey estimates 350 million people will be added to China's urban population by 2025). 
BMW has been in China for many years now.  BMW Financial Services began operations in China in 2010 although a mayority of its sales in that country are still done without financing. As for production, the state of the art plant in Shenyang (engine assembly, series 3 and 5) is no different technologicaly speaking than their Dingolfing or Munich facilities, albeit being much smaller in production capacity. There are 332 BMW and 76 Mini dealerships in the country as of now, thus BMW enjoys an unparallel distribution network (comparable only to Audi's).
We've only discussed China (with justification since BMW's sales in China are set to surpass their US sales in 2012 and thus become their number 1 market), however the oportunities ahead in India, South Korea, Russia, Turkey, Eastern Europe and Latin America are equally attractive.
As for the lifecycle of their model portfolio, it is not until 2016 that the company expects a high renewal rate and additional models to be introduced (the BMW Activehybrid, Active E and BMW i3 and i8 are all to be introduced in coming years).
Allow me to skip to BMW's current valuation:
Shares outstanding (voting+preffered non-voting): 655 mm
Price (BMW3): €44
Market Cap:  €28,820
- Cash and equivalents:    €6,927
- Marketable securities:     €2,134
- Net financial receivables from FSS: €4,620
- Net financial receivables from other entities: €2,390
+Financial liabilities:  €3,046
Enterprise value:  €15,725
-Financial services segment (at book value): €7,169
Core Enterprise Value: €8,626
Automotive division FCF: €3,494
Core EV/FCF: 2.4x
Dividend per-share: €2.32
Dividend yield: 5,2% 
Thus you can buy this premium company, who enjoys a wide moat within the industry and with very appealing growth prospects ahead at what in my opinion is a ridiculously low valuation.
A couple points to be made:
With regards to BMW Financial Services- we value BMW FSS at book value in order to lend further safety to our valuation. It is my opinion that a FS company whose consistently earned close to 20% ROE with a negligible credit loss rate (0.51% currently and at the peak of the financial crisis 0.84%).
We strip out the value for valuation purposes but without doubt BMW's FSS division is fundamental to the group's strategy in many ways (the average replacement rate of a buyer using financing vs a cash buyer is double and brand loyalty is also higher, 75% vs 63% plus buyers who are financing their purchase tend to add 40% more in additional optional equipment vs a cash buyer).
Other liabilities (namely pension obligations)- BMW has fully funded its pension obligations, no hidden liability here.
Having said all the real question is how much is this company worth?
I believe a company such as BMW should be worth no less than 12 times normalized free cash flow.
If we use the company's guidedance of FCF for the automobile division (which has historically been quite conservative), for the automobile division of €3 bn, that yields a €36 bn enterprise value. Add back cash plus BMW FSS at book value and we get a market cap of roughly €56 billion or roughly €86 per share.
If we get there in three to five years that would yield an annualized return of between 17 and 28% plus the dividends received (5.2% yield), which I expect to actually increase over time.
As to why is the stock trading at such a valuation I have no intelligent insight other than it being part of a disliked sector headquartered in Europe where automobile sales are most likely to continue suffering for some time.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Share class homologation (preferreds+ords)
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