Europe and especially Germany are currently offering value companies at bargaining prices. Germany is not "officially" in a recession, and just missed the official definition of a recession by a very small factor. Nevertheless, the German economy and that of Europe's is not doing well which shows itself in the depressed prices of the stock market.
In this article, I want to discuss the three major car companies Volkswagen (OTCPK:VWAGY), BMW (OTCPK:BMWYY), and Daimler (OTCPK:DMLRY). All three companies are currently trading below book value and at very low valuation multiples. The trade war and the tariffs that Trump wants to impose on car imports can potentially hurt the German car industry, but that fear is mostly built in the stock already. The depressed stock prices pushed the yield rate of all three companies well above 5%, now offering investors safe and high-yield stocks for a low price.
All three, (BMW, VW, Daimler) are currently in safer-mode and are initiating transitions from their old business model to a modern more autonomous model. VW wants to cut 30,000 positions until 2025, BMW initiated a hiring-stop, and Daimler started a Move-Initiative that intends to reduce costs of production by €4 billion. I will discuss these objectives later in this article.
What makes these companies interesting for value investors is that they have the infrastructure, the know-how, and the volume to transition to fully electric manufacturing facilities able to build more than 5 million cars a year. In fear of a global economic downturn, I tend to shift part of my portfolio to low-risk investments that offer a good yield.
BMW started a hiring-stop this year to slowly reduce the workforce over the next years. 2500 Employees are currently retiring each year at BMW, and 1500 are transitioning into part-time contracts to retire soon. On this way, BMW is reducing the number of employees on a more or less "natural way." This implies that BMW wants to reduce their cost and improve their margins, and at the same time, they work on a higher degree of automation in the production facilities. Both efforts take time and go well together.
One concern that I generally have with German companies is that their management copes only slowly with innovation and taking risks is not encouraged within German companies. Failure is necessary to learn, especially in new technology areas like electric cars and artificial intelligence. In Germany, the risk-mentality is very low, making learning-by-doing or learning-by-failing very hard to do.
Nevertheless, the company is trading at a PE-ratio of 6.25, a price-to-sales ratio of 0.46, and a PB ratio of 0.78. The stock is currently yielding 5.86%. At these valuation-levels, investors are buying the company at less than their asset valuation. Even if we remove their intangibles from their assets, BMW is currently trading slightly below book value. Investors are already showing their negative sentiment toward the business, and priced a potential downturn of BMW's earnings into the stock.
What I don't like about their approach for electric cars is that I find their cheapest electric car with a price tag of less than €30,000, the BMW i2, very ugly. I see the trend to these "pseudo-modern" electric cars that ought to distinguish themselves by looking "sharper." I like Tesla's approach; they create well-designed sexy looking electric cars that don't take on this hyper-futuristic look. Well, that's just a personal opinion.
On their way to cut 25,000 jobs until 2025. That's an ambitious goal and implies a strong message to their investors. Cutting 25,000 jobs is not only a sign to improve their margins, but it's a message that tells investors that they are planning something big in their manufacturing process.
VW initiated a collaboration with Amazon (AMZN) to streamline their production and logistics and start using Amazon's cloud service to monitor their global manufacturing network. I see this with mixed feelings, on the one hand, it gives a strong sign that VW is pushing towards a stronger digitalization of their manufacturing process, on the other hand, it looks a bit like desperation from VW sites to appear modern. Implementing these digitalization changes into their traditional systems might look good on the first glance but might lead to other problems in the long run if the facilities are not ready to adapt to those changes. It is a fight between modernization and tradition, and it is not the management that has to adapt to the changes but all the engineers working for VW that have to change their working behavior.
With a PE-ratio of 5.27, a price to sales ratio of 0.29, and a price to book value of 0.6, VW is valued at extremely low levels. This comes not only from the small advances in their electric cars but also from the continuing Dieselgate scandal in combination with the tariffs that Trump wants to impose.
Their stock price is currently implying all those news, which makes their stock trade at these low valuation levels. Their stock is currently yielding 6% but requires close attention from investors due to ongoing bad news.
Daimler's problem child is their Smart brand, which pushed investor's sentiment about the stock downward. With all the other news surrounding the German car industry and Germany's economy as a whole. Over the last year, Daimler's stock decreased by 25%, making their valuation metrics very attractive for value investors. Daimler released the news that they sold 50% of their Smart business to the Chinese car manufacturer Geely. Together they want to find a solution for the underperforming and unprofitable Smart brand.
Source: The Week UK
Daimler's PE-ratio is 6.75, PB-ratio is 0.74, and their Price to cash flow ratio is 4.33. Of the three companies, Daimler has the largest truck segment. Their truck-business runs quite well, and they are the market leader in class 6-8 (medium and heavy trucks) in the NAFTA region. Currently, their stock has a yield of over 7%!
The risks related to Daimler's stock are apparent; 25 % of their revenue comes from the NAFTA region, which implies the US. Tariffs and the current trade war might hurt their revenue substantially.
These are three >6% yield companies that are not under imminent danger of going bankrupt in a global economic downturn. In my opinion, investors are already pricing in the tariffs and the weak German economic situation into the stock price of these car companies. Their yield is extraordinarily high, and the valuation metrics are at all-time lows. I recommend these stocks as value companies with a low-risk profile and good return for investors.
As it is for cars, the car company that investors should invest in depends on the individual's taste. I like Mercedes (as one of Daimler's brands) and am inclined towards Daimler's stock, which offers the highest yield of all three companies. What I like about Daimler, is that next to their high margin luxury brand Mercedes, they have their truck division. In combination with electric trucks and self-driving technology, they have access to a $218 billion market with an estimates 8% CAGR over the next five years.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BMWYY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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