In Retrospect: BMW

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I look back at our two purchases of BMW.

BMW_logo

On March 16, 2017 and March 16, 2018, we bought a total of 30 shares of BMW at an average price of €84.50. In total, we paid €2,535.00.






What is BMW?

BMW Group – or BMW for short – is one of the world leading producers of premium cars and motorcycles. The history of the Munich-based company dates back to 1916 during WWI.

More than 100 years later, the company operates 30 manufacturing and assembly facilities in 14 countries, as well as a global distribution network with operations in over 140 countries. With its brands BMW, MINI and Rolls-Royce, the company is divided into 3 business units:

  • Cars
  • Motorcycles
  • Financial Services
BMW EBIT
BMW EBIT

By focusing solely on premium vehicles, BMW has been on a record-breaking path for years, benefiting particularly from rapid growth in China.

On the other hand, the automotive sector is currently experiencing one of its largest transitions in history. Until not so long ago, German carmakers were celebrated as the authority for vehicles with combustion engines. But after numerous emissions scandals customers had a change of heart, which now leads to a rapid electrification of the automotive world.

Like many of the established carmakers, BMW has misjudged the momentum behind the trend towards electromobility. But the success of Tesla showed the true potential of e-cars, as car manufacturers now try to outdo each other, announcing new electric models every other week.

Meanwhile, BMW seems to have taken on a pioneering role among the established carmakers. After the company started its e-activities with the i3 and i8 models in 2013, it is now launching its largest product campaign ever, aiming at 500,000 e-cars by the end of 2019.

Although this seems like an ambitious goal, it doesn’t look entirely unrealistic: Today, BMW is already the world market leader for premium vehicles with battery or hybrid drive as well as the number one for all e-cars in Europe.

Why BMW?

After BMW’s stock had been on our watchlist for quite some time, we finally put some skin in the game by March 2017.

However, our decision to initiate a position was not only based on a low price-earnings ratio (PER) of well below 10 or a dividend yield of more than 5%, but also on my personal preference for BMW’s vehicles (cars and motorcycles). And could there be any better reason for buying a stock than being a fan of the company’s products?

On top of that, BMW has had strong anchor investors for several decades. Today, almost half of the company’s shares are held by the German Quandt family. This gives the stock price a natural bottom, but also long-term stability, as no clan member has an intention to dump shares any time soon.

How did our investment in BMW turn out?

After we bought our first 15 shares at €83.50 in March 2017, we added further 15 shares at €85.50 in March 2018. So today, we own a total of 30 shares of the German premium carmaker.

In retrospect, there could have been better or worse moments to initiate a position during the past 1.5 years. The present discount (78.50€) compared to our average purchase price (€84.50) reduced the value of our holding by 7.1%. Meanwhile, we also earned €172.50 in dividends, so our result is balanced so far.

Chart BMW
Chart BMW

Is BMW’s stock still worth buying?

But should you still buy BMW’s stock today? That I want to show you based on our stock screener. So, let’s go!

How cheap is BMW?

I think a company’s stock is cheap if its current PER is lower than its average PER (since 2004). In case of BMW, current PER is sitting at 7.1. This is less than its long-term average PER of 11.5.

BMW Factor 1
BMW Factor 1

Therefore, BMW’s shares are currently significantly cheaper than usual. I grant 21.5 bonus points.

How strong is BMW?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of BMW, the lower of the two growth rates is 6.5% p.a. The company’s medium and long-term earnings growth is positive.

BMW Factor 2
BMW Factor 2

Therefore, BMW seems to be a strong company. I grant another 6.5 bonus points.

How robust is BMW?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of BMW, the maximum year-on-year drop in profits was 89.7% (FY2008). However, the company didn’t report any loss over the entire valuation period.

BMW Factor 3
BMW Factor 3

Nevertheless, BMW does not seem like a very robust company. I grant 26.8 minus points.

Is BMW currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of BMW, due to its robustness I would only allow a PER of 9.0. However, this is still more than its current PER (7.1).

BMW Factor 4
BMW Factor 4

BMW’s stock seems to be a bargain now. Therefore, I only grant 5.2 minus points.

Jung in Rente Score

The result of our stock screener – the so-called “Jung in Rente” score (JiR score) – is simply the sum of a company’s bonus and minus points. In case of BMW, that leads to a JiR score of 4.0 minus points.

BMW Jung in Rente score
BMW Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

With a JiR score of -4.0, BMW is currently not recommended for further purchases, but a potential candidate for our watchlist.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

BMW Dividends
BMW Dividends

Up until now, BMW pursued an investor-friendly dividend policy. The German company only had to reduce its dividend during the financial crisis 2008/2009. At present, BMW pays out about one third of its earnings, which is equal to a dividend yield of 5.1%.

Conclusion

Due to its low PER as well as its high dividend yield, we added BMW to our portfolio at an average price of €84.50 per share two times since early 2017.

As it turned out, we should have waited a little longer. Despite its strong market position in e-mobility, the Bavarian carmaker got hit hard by the newly imposed US trade barriers, with the result that the share price almost dropped to a 52-week low (€76.50)

However, I’m not very pessimistic about the future of BMW. Sure, it needs some time until the launch of all new e-car models will be completed by 2025. But the electrification of BMW’s SUV series will be an enormous growth engine for the company, which could result in new sales records from Germany to China and the US.

For this reason, I strongly believe in BMW and stick to the company despite the previous price drop. Should the share price see any further decline, I will even consider adding to our existing position.






What do you think about investments in the automotive sector and BMW in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

2 Replies to “In Retrospect: BMW”

  1. Nice write up JiR! I like the background information about the company and the analysis you performed. It seems like a good deal at current prices and I think it all comes down to if you believe BMW will be a front runner for electrical vehicles. People will always keep using cars, they will just turn electric, will BMW be smart about this? I’m sure they will. Congratulations on your shares in this great company!

    DI

    1. Hi DI!

      Thanks for your feedback! I’m convinced that BMW is the right choice in the automotive sector. Of course, it’s still a cyclical industry, so there is always the possibility for a rapid loss of value, should we see an economic slow-down any time soon. However, in such a scenario, I will be more than happy to get my hands on even more shares, while averaging down my entry price.

      – David

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