Oct. 09, 2022
Summary BMW has traditionally achieved high margins, very high returns on capital, and it has great pricing power. The scarcity of BMW cars on the market is more than compensated by the high margins that are currently enabling BMW to make new-record profits. Even after investing in production, additional growth, technology, and research, BMW still generates an enormous amount of free cash.
We consider BMW to be the best managed car company. Its overall strength is founded not only upon that of its brand and intellectual property, but above all on the quality and performance of its products. As a result, BMW has traditionally achieved high margins, very high returns on capital, and it has great pricing power, which, by the way, we can see today better than ever. The semiconductor shortage is holding all carmakers’ production below their capacity for the second year in a row.
Demand often is outstripping supply, and the scarcity of BMW cars on the market is more than compensated by the high margins that are currently enabling BMW to make new-record profits. BMW is well diversified regionally, both on the production side (Germany, USA, Mexico, China, etc.) and on the sales side. Its main market is China, but it also has strong positions in Europe and the USA. In addition to being a leader in manufacturing quality, BMW is also a technological leader in all types of engines.
Our only historical criticism of BMW has always concerned its overly cautious approach to using its surplus cash. Here too, however, things have changed. Even after investing in production, additional growth, technology, and research, BMW still generates an enormous amount of free cash. Although it regularly pays out a third of its profits in dividends, surplus cash has been piling up on the balance sheet and lying idle for a long time.
Just to give you an idea, BMW’s automotive arm has a net cash position of approximately EUR 30 billion, and billions more are added every year. The magnitude of this sum is particularly striking when compared with BMW’s market capitalisation of just EUR 46 billion. This year, management finally got the ball rolling and began buying back the company’s own shares. With BMW shares trading at a P/E of 4, this is the best course of action. Doing so has significant positive impact on the company’s fundamental value.
I believe that BMW, in its traditionally methodical and systematic approach to things, will buy its own shares regularly and over the very long term. We then have no choice but to wish that their price will remain low for as long as possible.
https://seekingalpha.com/article/...a-fund-bmw-surplus-cash-piling-up
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