Bayerische Motoren Werke: Strong Revenue Growth And Neue Klasse Anticipation Building (OTCMKTS:BMWYY)

Investment Thesis: I take a bullish view on BMW Group given strong growth in revenue as well as further anticipation of growth with the upcoming Neue Klasse model releases.

Bayerische Motoren Werke or BMW Group (OTCPK:BMWYY) is a stock that saw a strong recovery post-COVID as a result of significant growth in demand across the electric vehicles segment and encouraging performance across the luxury car market more generally.

More recently, we see that the stock has been trading in a stationary manner over the past year – trading at a price of $37.76 at the time of writing.

The purpose of this article is to assess whether BMW Group has the capacity to boost growth further going forward, taking recent performance results into consideration.

Performance

When looking at the BMW Group Report for 2023 as released on March 21, 2024, we can see that revenues were up by 9%, which outpaced growth in cost of sales of 6.6%. Additionally, EBIT (or profit before financial result) showed growth of 32% as compared to the previous year.

Additionally, when looking further into revenue and EBIT performance by segment, we can see that Automotive (the largest segment by revenue) continued to show strong growth as compared to the previous year – with 7% growth in revenue and 22.1% in EBIT across this segment.

With that being said, we can also see that the Automotive segment saw a significant decrease in free cash flow of over 37% – with growth of nearly 8% in total capital expenditure having contributed to this decline.

From a balance sheet standpoint, we can see that the quick ratio (current assets less inventories and prepaid expenses all over current liabilities) for BMW Group has continued to remain below 1 over the past year – indicating that the company does not possess sufficient assets to meet its current liabilities.

Click to enlarge

Source: Figures (in € millions) sourced from BMW Group Report 2023. Quick ratio calculated by author.

From a longer-term standpoint, we can see that non-current provisions and liabilities relative to total assets have remained virtually constant to that of last year:

Click to enlarge

Source: Figures (in € millions) sourced from BMW Group Report 2023. Non-current provisions and liabilities to total assets calculated by author.

My Perspective and Looking Forward

When comparing the P/E ratio for BMW Group in 2019 and the present (it was chosen to exclude 2020 and 2021 due to an abnormally high P/E ratio as a result of the price drop during the COVID-19 pandemic), we can see that while the stock is trading at a similar P/E ratio (6.78x in March 2019 as compared to 6.297x at present), EPS has also seen significant growth from $4.234 to $6.211.

March 2019

March 2024

Additionally, when looking to the price chart at the beginning of this article, we can see that the current price remains higher than the $24-30 range that we observed back in 2019. In this regard, I take the view that the current price of $37 is a good reflection of fair value at this time.

When looking at competitors Volkswagen AG (OTCPK:VLKAF) and Mercedes-Benz Group (OTCPK:MBGAF), we can see that while the P/E ratio for BMW Group is slightly higher – all three companies are trading within a similar range.

In this regard, I take the view that BMW Group is also fairly valued relative to its peers.

Going forward, BMW Group continues to place the Neue Klasse at the center of its strategy – set to launch in 2025. Specifically, the Neue Klasse encompasses a generation of new BMW models, which are designed as all-electric models which are fully digitalised and place a focus on sustainability.

BMW Group has a goal of launching six models belonging to the Neue Klasse from 2025, within 24 months of production commencing. From 2027, BMW Group has a goal of only producing electric vehicles from its main plant.

Moreover, with the planned introduction of the first X model of the Neue Klasse in 2025 – which is anticipated to represent a significant improvement over the current iX and XM models – I am optimistic that BMW Group has the capacity to further boost revenues across its Automotive segment going forward.

While I previously stated that BMW Group has been seeing a decrease in free cash flow, this has been in significant part due to increased investment in the Neue Klasse, which resulted in a higher cash outflow.

However, I take the view that investors are willing to ultimately tolerate a temporary dip in free cash flow if this means that production targets for the Neue Klasse can be met – as this new generation of cars are expected to represent a significant revenue source for BMW Group going forward.

Risks

I take the view that the launch of the Neue Klasse and BMW Group’s emphasis on vastly accelerating electric vehicle production is a good strategy over the longer-term. However, that is not to say that such a strategy does not present risks in the short to medium-term.

Electric cars are substantially more expensive than traditional ones, and competitor Mercedes warns that it will be many years yet until we see prices of the two groups approach parity.

In fact, while Mercedes had originally set a target of 2030 for becoming an all-electric vehicle company, these plans have now been scaled back – with it now being estimated that half of its sales are expected to be electric by this time.

While this could potentially allow BMW to get ahead of its competitor if electric vehicle demand has seen substantial growth by 2027 (the year BMW plans to go fully electric) – this could also result in BMW limiting the size of its market. The market for consumers targeting traditional luxury cars may still be substantial by this time, and BMW could potentially lose out on revenue if its market becomes too small.

Conclusion

To conclude, BMW Group has continued to see substantial growth in automotive sales and its expansion of its electric vehicle fleet with the Neue Klasse generation has the potential to significantly grow revenue. While the company’s all-electric vehicle strategy is not without risk, I nevertheless take a bullish view on the stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.