BMW AG (XTER:BMW, Financial) (4.3% portfolio weight) - A global shortage of semiconductor chips has been impacting global supply chains in a wide range of industries. As we write, a variety of estimates have been offered as to when increased availability might be achieved, often centering on the middle of 2022, though improvement will ultimately be contingent upon whether additional virus-related disruptions present themselves in any number of countries. For the global automotive industry, estimates of the impact of disruptions currently gravitate toward a high single-digit percentage of total global passenger vehicle production lost in 2021 to the lack of chip supply.
BMW is not immune and will produce reduced volumes in the second half of 2021. On the other hand, it has been clear that a shortage of new and used passenger vehicles has caused a substantial improvement in the pricing environment, at least from the auto company’s perspective. BMW had produced an excellent first half 2021 performance in spite of chip and virus challenges but the future net impact of reduced volumes and higher costs, offset by higher auto prices, has been difficult to predict. However, a recent press release from BMW offered more clarity and several encouraging data points. On September 30th, BMW substantially increased its operating performance guidance for 2021, particularly for margins from the automotive business (as opposed to the finance business) to levels rarely seen during the last decade. Thinking about this in terms of valuation, if you take BMW’s current automotive business net financial assets of more than EUR 20 billion and a modest valuation for its finance business, the current market cap of BMW attributes almost no value whatsoever to its automotive business. The release also noted that the automotive business is expected to produce roughly EUR 6.5 billion of free cash flow this year. Meanwhile, a strong anticipated uplift for the financial services business was also confirmed by the release with increasing residual values of used BMWs and low credit losses expected to enable a financial services return on equity between 20% and 23%. While the excellent performance of the finance business was expected, the automotive profit and cash flow guidance clearly exceeds our expectations under the circumstances. It is intuitive then that BMW management have recently begun speaking publicly about the possibility of more substantial cash distributions to shareholders.
“Used-car prices, one of the biggest factors in U.S. inflation this year, rose to an all-time high in September as pandemic-driven supply-chain disruptions continued.” Bloomberg – October 7th 2021
From the Third Avenue Value Fund (Trades, Portfolio)'s third-quarter 2021 commentary.
