Bayerische Motoren Werke, BMW (BAMXF.PK) for short, is a German luxury car manufacturer. What is it that makes this company wonderful and a great investment opportunity over such rivals as General Motors (GM), Volkswagen (VLKAF.PK), Ford (F) or Fiat (FIATY.PK)? I will try to make my case with four points below.
Firstly, BMW needs sound financials to qualify as a potential investment target. The company has delivered impressive numbers and remained profitable in the past years despite a challenging environment that has caused the competition to suffer. BMW saw 10% volume growth year-on-year in October this year with Q3 EBIT of €2bn against analyst consensus of €1.7bn ($2.2bn). This with almost 10% EBIT margin.
Current P/E stands at 9.11, whereas S&P forecasts FY13 forward P/E as 7.4, as of November 6th. 52-week stock price has varied between €49.42 ($63.90) and €73.95 ($95.6). At the time of writing the stock stands at €67 ($86.50).
During the downturn of 2008-2009, the company made wise investments on production plants in China and South Carolina. BMW sees strong, increasing demand both in the US and China, where it is not a secret that there is a lack of proper public transport infrastructure. In China, there is also a rising number of people with enough purchasing power to be spending on luxury products.
In my humble opinion, the US and China are the first ones to come out from the economic dismay of present. Hence I expect the demand remaining strong in these key markets, offsetting the risk of weak demand in Europe.
The second point is BMW's forward looking management. BMW CEO Mr. Reithofer has been with the company for a long time, since 1987, and as chief executive since 2006. Mr. Reithofer manages not only BMW branded vehicle business, but Mini and Rolls-Royce too. All of these brands are doing extremely well.
It is worth noting that Mr. Reithofer foresaw the subprime crisis and only months after becoming CEO, slowed the costly US expansion of the company. He cut costs by over $6 billion. Even though the job cuts did not please everybody, after turbulent years through the subprime and finance crisis, the result was that BMW was one of the rare automobile manufacturers that remained profitable. In 2011, BMW's EBIT margin stood at just under 12%.
Now, BMW is making new bets. Next year, the i3 electric vehicle is being introduced to the market. The pricing of the car is rumored to be around €40 000 or $55 000 in the US. The vehicle is built around aluminum and carbon fiber structures and the range is just below 260km (160 miles). As a risk though, it is still unclear if all the questions around battery raw materials and environmental issues are fully solved.
All in all, this may be a very clever move. The former BMW design chief, Chris Bangle, has stated that there is a lack of new generations of car lovers, as according to him there is a decline of the industry's "lifeblood - customers who grow up caring about cars."
Whatever happens in the economy or climate, people still need to get around. More affordable, light and convenient electric vehicles may be exactly what will become appealing to the post-combustion engine mass market.
Thirdly, BMW excels in technological innovation. For example, the xDrive four wheel drive system is renowned to be even better than Audi's pioneering Quattro technology. BMW is also said to be ahead of the competition in developing carbon fiber car structures.
My fourth and final point is that BMW is practically family owned. 47% of the stock is owned by the widow and children of Herbert W. Quandt. Mr. Quandt basically bailed out the company in the 60s when BMW was going under. This ownership structure allows the company to make much more long-term strategic choices than companies under the thumb of impatient stock exchange shark ownership.
The fact that BMW is essentially a luxury car brand can also be seen as a risk. The current general economic climate, or changes in the actual climate do not support the idea of expensive and gasoline hungry vehicles. But, with investment in electronic and hybrid vehicle technology, perhaps BMW is able to turn this risk into business?
To sum up: Strong financials, good positioning in extremely lucrative growth markets, great forward looking management and excellent ownership structure, beautiful products and a strong brand spells out an excellent opportunity.
Oh, and a dividend. In 2012 the dividend yield stood at a satisfactory 3.5% for ordinary stock.
Disclosure: I am long BAMXF.PK.