“The best or nothing” – Mercedes Benz
“The Ultimate Driving Machine” – BMW
In the past few days/weeks, Mercedes and BMW reported their earnings. The results were consistently terrible. The stock price after earnings release reflected the disapproval from public market.
Indeed, if we take a closer look at these German car giants, they are facing increasing regulations in EU on emission standards and existing car retrofit requirements. There are existing requirement on what kind of cars are allowed to be on the road from April 2019 onward. Mercedes and VW are still dealing with law suits from emission test scandal and all are dealing with trade frictions which increased their cost significantly.
Besides the near term challenges from regulation and trade friction, they are also dealing with slowing down sales at or near the peak of this economic expansion, especially challenges in Chinese market where middle class consumers are strapped with mortgage debt and economic slowdown. Fancy German import cars become more and more like a pipe dream rather than immediate purchase decision.
Secular trend-wise, ride-sharing platforms significantly reduced the imminent need of having a car to get to somewhere. All you need to do is to take out your phone and call a Uber or Lyft. You don’t need to deal with the trouble to maintain a car, pay car insurance, deal with services and even spend your attention to drive to somewhere (or look for a parking). These all enabled a lot of activities without owning a car.
Another secular trend – electrification of car industry. Tesla and BYD of the world are bringing unprecedented challenges to traditional car industry. You may see a lot of fancy “concept” model in auto show and think that Tesla will face strong challenges – not really. Based on my current analysis, Tesla has at least 2 years of head start ahead of these traditional car makers in terms of charging infrastructure build-out, and autonomous driving progress. Not to mention battery technology. In new technology world, 2 years of head start is a huge deal. It allows you to build economy of scale and gain significant market share. Users will be used to your systems before being forced to learn some other platforms.
All the factors above pretty much explained the 5.75 PE multiples these companies are being valued at. The cyclical companies (like, car makers) tend to have a pattern of low PE at the peak of a cycle and higher PE at the trough of a cycle. This time it is no exception. However, if the pessimism mounted too much and the price is pushed down too far, certain bargains make present themselves for value investors to take advantage of.
Waiting for the other shoe to drop or the last straw on the stock price’s back.