Another Global Brand At A Knock-Down Price

Published in Investing on 2 December 2011

This luxury marque is going cheap.

If you were to invest in one car company, which would it be? Toyota (NYSE: TM.US) would be a strong candidate, as the world's biggest mass-market carmaker, but I would have concerns about the strength of the yen and the continuing impact of the Japanese earthquake.

Volkswagen would also figure strongly in my thinking, and a fellow Fool has already written about its merits.

But I think I would go for BMW. Why? Because I think luxury brands are proving to be good investments with solid earnings in this troubled, crisis-wracked world. And in the automotive sector I can think of no stronger luxury brand than BMW.

What's more, as the eurozone crisis knocks shares across Europe, we are starting to see some remarkable bargains. You can now invest in some world-class companies for knock-down prices.

Saved by the Quandts

BMW was created in 1917 and was actually initially an aircraft engine manufacturer. Indeed the BMW logo is a representation of the movement of an aircraft propeller -- with white blades cutting through a blue sky (bet you didn't know that!)

But the Versailles Treaty stopped it from making aircraft engines, and it instead made motorcycles and then, in 1929, cars. The first car BMW made was the Dixi, which was based on the Austin 7.

BMW really only became a major international marque from the 1960s onwards, with the launch of the New Class, after substantial investment by the Quandt family, who saved the company from possible liquidation.

Motoring ahead

Today the Quandts still own 46% of BMW. The business now makes 1.5 million cars a year across its three main brands, BMW, Mini and Rolls-Royce. Although the bulk of its manufacturing operations are in Germany, the company has major sites in the UK, where 240,000 Minis are made each year at Oxford, Hams Hall and Swindon.

The company is growing steadily. In the past ten years, BMW has increased the number of cars it produces by over 60%. And despite a very competitive marketplace, the car maker has maintained a gross margin of 18%.

The results for the third quarter of 2011 showed net profit of €1.1 billion, an increase of 24% on the same period in 2010. So business is booming. Europe may be slowing down at the moment, but BMW is the biggest selling premium car brand in the US, and it is getting more and more of its profits from emerging markets.

Despite the impressive figures, the BMW share price has fallen from a high of €72 to its current price of €55, which puts it on a trailing P/E ratio of just 11. And with profits currently rocketing the forward P/E ratio is likely to be around 8. This is a premium brand which is going cheap.

A new partnership

But this car company is also gearing itself up for the future. It is ploughing hundreds of millions of euros into research. It recently made its first foray into the world of electric vehicles, and this week it announced a far-reaching partnership with Toyota.

The two companies complement each other well. Toyota will offer BMW access to its world-leading hybrid technology made famous by the Prius, and BMW in return gives Toyota access to its clean diesel technology.

The two companies also plan to work together to develop better lithium-ion batteries for the next generation of electric vehicles, and they will explore other areas of cooperation as well.

To me it looks like a partnership with great potential and is another reason to invest in BMW.

So, to sum up: for me this is a business with a great future at a bargain price. I'm keeping BMW on my watchlist, ready to seize the chance if more eurozone ructions cause the share to take another dive.

> Don't miss the Fool's latest free report, available for a strictly limited time only -- get your copy of 3 Shares We're Ready To Tip

More on European shares:

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

ANuvver 02 Dec 2011 , 10:27am

Decent investment case, but as a UK investor I find German withholding taxes a real turn-off. Don't mind the euro exposure so much.

Dozey1 06 Dec 2011 , 11:05am

When they go front-wheel drive I might be interested. Have you driven one in snow? Don't.

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.