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Seeking Driverless Cars, BMW-Style

- By Mark Yu

Last week, German carmaker Bayerische Motoren Werke (XTER:BMW) (BMWYY) declared the company is on its way to deliver a level 5 autonomous car by 2021. According to Reuters, a level 5 vehicle is capable of navigating roads without any driver input.


Earnings performance

The $58 billion German carmaker reported its fiscal 2016 results last week. BMW reported 2.16% sales growth to 94.2 billion euros ($102.4 billion) and 7.76% profit growth to 6.9 billion euros--a 7.29% profit margin compared to 6.91% in 2015.

In addition to its lower than three-year average top-line growth, profit growth was mostly achieved secondary to BMW's lower overall operational growth expenses at 1% versus 7.9% in 2015.


"Once again, we are targeting record sales volume, revenues and earnings in 2017," Harald Kr?ger, BMW chairman, said. "The BMW Group forecasts a slight increase in Automotive segment deliveries to customers in the current financial year, which would result in a corresponding growth in segment revenues. Group profit before taxes is also expected to improve slightly.

Leadership in innovation and sustainable profitability are the keys to our success. That's why, we are fully focused on meeting the wishes and needs of our customers, with the aim of igniting their enthusiasm for mobility day after day with appealing products and services.

With this in mind, the BMW Group will be rejuvenating its product portfolio significantly in the coming years.

We intend to launch more than 40 new and revised models of our three premium brands on the market during 2017 and 2018. The new product offensive began successfully with the launch of the new BMW 5 Series in February, further raising the bar in the business sedan segment."

Particular emphasis will be placed on the top end of the premium segment. By 2020, the BMW Group is targeting significant sales volume growth in this area with the addition of a number of new models, including the BMW X7, to complement the BMW 7 series."



BMW ADR shares appreciated just 0.71% post-earnings announcement.

Outlook

(BMW)

Valuations

The company trades at good discount compared to its peers. According to GuruFocus data, BMW has a trailing price-earnings ratio of 7.84 times versus an industry median of 18 times, price-book value of 1.2 times versus an industry median of 1.7 times and price-sales ratio of 0.58 times versus an industry median of 0.8 times.

BMW also has a trailing dividend yield of 4.1% with a 30% payout ratio.

Based on Reuters data, BMW would have forward price-sales figure of 0.63 times and 8.72 times using 2017 sales and earnings per share projections.

Total returns

BMW ADR shares underperformed the broader S&P 500 index consistently in the past five years. This year, the company's shares delivered total loss of 3.8% compared to the S&P 500's 5.4% total return. In the past five years, meanwhile, BMW has provided a 3.6% total return versus the S&P 500's 13.4%.

(Investor Presentation, BMW)

Bayerische Motoren Werke

Bayerische Motoren Werke Aktiengesellschaft, based in Munich, Germany, is the parent company of the BMW Group. BMW AG was founded on March 7, 1916--101 years ago.

The general purpose of the BMW Group, or BMW, is the development, production and sale of engines, engine-equipped vehicles, related accessories and products of the machinery and metalworking industry as well as the rendering of services related to the aforementioned items.

As of 2016, BMW operates on a global scale and is represented in more than 150 countries worldwide.

In the recent fiscal year, BMW generated 32% of its sales, or 30.54 billion euros, from the rest of Europe--excluding Germany. 18% of total sales came from China, 17% from the United States, 15% from Germany and 11% from the rest of Asia--excluding China.

As observed, BMW suffered an 11.9% drop in U.S. sales in 2016 compared to 2015.

BMW is subdivided into the Automotive, Motorcycles, Financial Services and Other Entities segments.

Automotive

According to filings, BMW's Automotive segment has worldwide distribution network consisting of around 3,400 BMW, 1,580 MINI and 140 Rolls-Royce dealerships.

In 2016, automotive sales grew 1% to 86.42 billion euros--representing 91.8% of total BMW sales. The segment delivered a profit margin before tax of 9.2%--highest margin among the group--compared to 8.8% in 2015.

Specifically, BMW's car sales volume increased 5.2% to 2 million cars, MINI car volume grew 6.4% to 360.23 million cars and Rolls-Royce sales grew 6% to 4 thousand cars.

In addition, BMW analyzes its performance per segment level using return on total capital or equity (2).

In 2016, BMW's automotive segment delivered a return on total capital of 74.3% compared to 72.2% in 2015. The strategic target for BMW's automotive segment's return on total capital is 26%.

Motorcycles

The motorcycle business is focused on the premium segment, with the model range currently comprising motorcycles for the Sport, Tour, Roadster, Heritage, Adventure and Urban Mobility segments.

In 2016, around 1,180 BMW Motorrad dealerships operated worldwide.

In the recent fiscal year, motorcycles sales grew 4% to 2.1 billion euros or 2.2% of total sales. The segment delivered a profit before tax margin of 8.9% versus 9% in 2015.

Further, motorcycles also delivered a return on capital employed of 33% versus 31.6% in 2015. The strategic return on capital employed target for the motorcycles segment is 26%, according to filings.

Financial Services

BMW is also among the leading providers of financial services in the automobile sector. Credit financing and the leasing of BMW Group brand cars and motorcycles to retail customers represents the segment's main line of business.

The performance of the financial services segment is measured on the basis of return on equity (3).

In 2016, BMW's financial services grew 8.2% to 25.7 billion euros or 27.3% total company sales and delivered a profit before tax margin of 8.4% versus 8.3% in 2015.

The segment also delivered a return on equity of 21.2% versus 20.2% in 2015. The strategic return on equity target for the segment is at least 18%.

Sales and profits before and after tax

(Annual Report)

In the past three years, BMW had sales and profit growth and margin averages of 6.5%, 6.9% and 6.8%, respectively.

Cash, debt and book value

As of December 2016, BMW had 14.95 billion euros in cash and current financial assets and 97.73 billion euros in financial liabilities, ending up with a cash to total equity ratio of 2.06 times compared to 2.14 times in 2015 (1).

Only 4% of BMW's 188.5 billion euros in assets is identified as intangibles. The company also had a book value of 141.2 billion euros compared to 129.4 billion euros the year prior.

Cash flow

(Annual Report 2016, BMW)

In 2016, BMW grew its cash flow from operations by an impressive 230.5% to 3.2 billion euros. The company delivered increased cash flow resulting from changes in provisions and other operating assets and liabilities, while having less cash outflow concerning leased products, working capital and income taxes paid.

Capital expenditures, including investments in intangible assets, were 5.82 billion euros, leaving BMW with free cash (out)flow of 2.65 billion euros versus outflow of 4.93 billion euros in 2015.

(2015 and 2016 Annual Reports, BMW)

As observed, BMW was able to sustain--even grow--its total dividend payouts in recent years despite consistent free cash outflow.

BMW also invested 198 million euros in investments, net proceeds, and another 148 million euros in investments in marketable securities and investment funds, net proceeds, in 2016.

(2015 and 2016 Annual Reports, BMW)

Further, BMW seemed to gather more of its positive cash flow from issuing bonds, non-current financial liabilities and commercial paper--net repayments--in recent years.

Conclusion

BMW has demonstrated consistent business growth and profitability in the past half decade. The German luxury carmaker delivered and even surpassed its own targets in terms of operating profitability in all segments.

BMW has also been remarkably generous to its shareholders despite carrying a large debt load.

BMW has set up a goal of 8% to 10% growth in earnings before taxes by 2020. Although there is nothing wrong with this profitability target, the car company still needs to generate more than this in order to trim down its debt gradually.

(BMW Germany Share Price and iShares Core S&P 500, Financial Times)

Thirty analysts had a median target of 87 euros a share, a 4.7% upside from today's share price of 83.08 euros.

Asking a 20% margin after applying five-year profit growth and earnings multiple averages would indicate a value of 85 euros a share.

Even ignoring BMW's debt levels, the company's shares would still be a buy with a minimum upside of 3.6% to 86 euros per share target.

Notes

  1. Me:



BMW financial liabilities:

(Annual Report 2016, BMW)

2. Annual Report:

Operating performance at segment level is managed at its highest level on the basis of return on capital. Depending on the business model, the segments are measured on the basis of return on total capital or equity.

3. Annual Report:

Return on equity is defined as segment profit before taxes, divided by the average amount of equity capital attributable to the with the non-financial value driver sales volume.

Disclosure: I do not have shares in any of the companies mentioned.

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This article first appeared on GuruFocus.