BMW

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

BMW is a global luxury car manufacturer with a strong brand, known for its engineering and performance. The company also owns the Mini and Rolls-Royce brands and has a growing presence in the electric vehicle market.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: BMW operates primarily in three segments:

  • Automotive: This segment comprises the development, manufacturing, marketing, and sales of automobiles under the BMW, Mini, and Rolls-Royce brands, along with parts and accessories, and related services. The business is mostly dependent on the demand for new vehicles and consumer preference in new cars.
  • Financial Services: This segment comprises the financing, leasing and insurance services for BMW products and is dependent on interest rates and defaults.
  • Motorcycles: This segment encompasses the design, development, production, and sale of motorcycles under the BMW Motorrad brand.

Revenue Distribution

*Automotive segment makes up for a majority of the revenue. Within Automotive, a bulk of it is from Europe followed by China and America.

Industry Trends:

  • Electrification: The automotive industry is undergoing a massive shift towards electrification, with governments worldwide pushing for greater adoption of electric vehicles. All major car companies are competing for domination in this growing market.
  • Autonomous Driving: Autonomous driving technology is another huge trend with major companies investing millions of dollars to capture the market share. Level 5 self driving remains hard to reach for most car manufacturers.
  • Connectivity and Digitization: Car manufacturers are increasingly incorporating digital technology into the driving experience. From advanced driver-assistance systems (ADAS), to in-car entertainment and mobile connectivity, cars are becoming more like sophisticated computers.

Competitive Landscape:

  • BMW faces stiff competition from other luxury car manufacturers, including Mercedes-Benz, Audi, and Lexus. In the EV space, newer brands like Tesla, Rivian and Polestar pose strong competitive challenges.
  • The automotive industry is very competitive and features heavy capital spending on R&D, plant, and equipment.
  • New entrants from China are growing, some of which will likely be successful and take away market share from established players.

What makes BMW different?

  • Strong Brand: BMW is a widely recognized and respected brand, known for its German engineering and focus on performance. This brand equity allows BMW to charge premium prices and maintain a loyal customer base.
  • Engineering Prowess: The company is known for making reliable and high quality, fast cars with the most updated technology integrated in it.
  • Luxury Focus: BMW has established a clear positioning within the luxury market and maintains a steady stream of new product introductions and brand launches to stay relevant.
  • Manufacturing Capabilities: BMW operates a worldwide network of production facilities, creating high barriers to entry for its competition. It also gives them a first look at new technologies that are useful for manufacturing.

Financials Analysis:

  • Profitability: BMW’s profitability is driven primarily by its automotive segment. Profit margins have been relatively consistent over the past several years, although challenges remain related to electrification and increased competition.
  • Revenue Growth: BMW’s revenue growth has been solid in the past decade despite the emergence of new competitors. However, growth has been slower in mature markets, with a more dramatic increase in China.
  • Debt: BMW takes on a considerable amount of debt as part of its financial services business. A large amount of auto loan receivables that appear as assets on the balance sheet are matched by an equal amount of liabilities in its debt profile. While the business model requires this, a decrease in consumer defaults will positively affect the business and reduce risk.
  • Capital Expenditures: BMW has a very high capex as they have to continually update their car lines and invest in new technologies. Their current R&D spending is north of $7bn a year, and is growing. This limits the company’s profitability and keeps a check on the margin.
  • Free Cash Flow: Free cash flow has improved in recent years as sales have increased and is driven primarily by the profitability of its Automotive segment.
  • Guidance: BMW is aiming at a slight increase in revenue for 2024 and will be allocating 4 billion Euros towards research for further technology developments. The company is also expecting slight improvements in earnings due to a more efficient cost structure.
  • Management on current issues: BMW’s CEO has recently acknowledged the challenges the company faces in maintaining profitability while transitioning towards electric vehicles and stated that the company will be focusing on improving efficiency and cost structure. Management has also been bullish on the growth of EVs, citing higher sales numbers than internal projections and expecting this segment to grow much more rapidly in the near future.

Moat Assessment:

  • Moat Rating: 3/5
  • Justification: BMW possesses a narrow economic moat. Its strong brand creates a premium price point for its products which is hard to replicate and can last for decades. However, the automotive industry is intensely competitive and faces technological disruption. Competitors are always coming up with cheaper, better cars and car features, which creates a volatile business environment for BMW. Other car brands such as Mercedes-Benz and Audi also enjoy similar levels of brand recognition. A big part of BMW’s future hinges on its transition into electric vehicles, and if the management and the engineering is not on point with the industry, the company could suffer greatly. The car industry is still largely commoditized, where a good car will get commoditized eventually, which limits sustainable competitive advantages.

Legitimate Risks to Moat:

  • Technological Disruption: The biggest threat to BMW lies in technological disruption. If the company is not able to innovate quickly enough, it could potentially be overtaken by more nimble competitors. The shift to EVs poses challenges in terms of battery technology and battery production.
  • Brand Dilution: The company runs a risk of losing its premium brand positioning because of increased competition and brand fatigue. This is especially relevant if there is a significant slowdown in the luxury segment.
  • Industry Cyclicality: The automotive industry is cyclical. Economic downturns can affect BMW’s sales and its profits.
  • Raw Material Prices: Changes in commodity prices for the material that goes into car manufacturing can significantly affect the company’s margins.
  • New Entrants: New competitors in the EV space may erode BMW’s market share. If they manage to establish brands that are more desirable, it could seriously threaten BMW.
  • Changing Consumer Preferences: Consumer preferences are always shifting. BMW needs to be ready to anticipate trends and move ahead. If they are slow to adapt, it could hurt the business.
  • Overexpansion: BMW is growing to gain market share in all markets, if the investment does not prove profitable, it could negatively affect the business model.

Understandability

  • Rating: 2 / 5
  • Justification: BMW’s operations are relatively complex because it spans several different business segments. While the Automotive segment is easily understandable, the details of the financial services segment, the nuances of the car market, and various different partnerships and acquisitions create a higher barrier to understanding. Having a proper view of the company requires both an understanding of automobile manufacturing, financial derivatives and consumer behaviour.

Balance Sheet Health

  • Rating: 4 / 5
  • Justification: BMW has a reasonable debt to capital ratio that is mostly driven by the company’s financial operations, and this debt is largely secured by their auto loan receivables. The company has good amounts of cash, solid current assets and a solid current ratio. That said, their huge fixed assets mean they also have high depreciation costs. Overall, the company’s balance sheet is quite healthy and allows them to perform well in turbulent times.