I have long been bearish about electric car maker Tesla (Nasdaq: TSLA). In fact, I once called it “the most overvalued stock I’ve ever seen.”
With all of the excitement that surrounded Tesla and electric vehicles (EVs), traditional automakers fell out of favor. The conventional viewpoint was that Tesla had such a big first-mover advantage in EVs that no other company would ever compete.
It took a while, but the market has finally come around to my line of thinking. Tesla’s stock is down nearly 75% from its all-time high.
Despite the big decline, I’m still not interested in Tesla shares. There is, however, an automaker whose stock I am much more bullish about.
With their strong cash flows and existing manufacturing infrastructure, traditional automakers have proven capable of giving Tesla all the competition it can handle and then some.
And the stock market isn’t properly recognizing that, which makes the spotlight of today’s Value Meter an undervalued opportunity…
That company we’re looking at today is luxury European carmaker BMW (OTC: BMWYY).
With roots tracing back to 1916, the BMW brand is a global powerhouse. And its name has a centurylong reputation of excellence.
Brand strength means pricing power. Pricing power means fatter profit margins. And fatter profit margins mean higher returns on shareholder capital.
For its part, BMW has invested aggressively in EV technology. Today the company generates one of the highest percentages of sales from EVs of all large automakers.
In 2022, 10% of BMW’s sales came from EVs.
Even more important, profit margins on BMW’s EVs are coming in nearly on par with its traditional combustion engine models.
That alleviates a concern that the transition to a higher EV sales mix would eat into BMW’s profit margins.
The Perfect Picture
Overall, BMW is an incredibly well-run organization.
First off, the company is built on a rock-solid balance sheet that features a massive war chest of $32 billion in net cash.
You can sleep well at night owning a company with that kind of financial position.
Second, insiders (e.g., the Quandt family) own 45% of BMW’s stock. This big insider ownership provides incredible incentive to make sure the company is run prudently and in the best long-term interests of shareholders.
Third, the stock is cheap, cheap, cheap!
Trading at just 0.7 times book value, BMW shares are not much above where they were during the depths of the global financial crisis.
Historically, the company has traded for closer to 1.2 times book value. And the company has grown that book value at a rate of 11% per year.
Fourth, management is taking advantage of the discounted share price by buying back stock at a rapid clip. Recently, BMW has been reducing its share count by roughly 10% per year.
I don’t always love buybacks, but I most certainly do when a stock is trading at a bargain price.
Finally, the company pays a huge dividend of nearly 6.5% to shareholders.
Wow! With a dividend like this, we don’t even need the stock price to go up.
When we put all of these things together, it creates a very compelling proposition.
We have a stock that has a powerful global brand, a terrific balance sheet, an excellent valuation, opportunistic buybacks and a big dividend.
This a value play, a dividend play and a balance sheet play – all in one.
The Value Meter ranks BMW as “Extremely Undervalued.”
