Valuation of Bmw Free Essays

Valuation BMW Group | BUSM31 – Strategic Financial Management| 2010-10-27| Group 14| | | Tutor: Authors: Mans KjellssonDaniel Hedevag Jonas Karlsson Mathias Ljungberg Jakob Tuvehjelm Background BMW is one of the ten largest automobile manufacturers in the world, with an annual production of 1. 3 million cars (2009). It is furthermore one of the leading manufacturers in the premium car segment. We will write a custom essay sample on Valuation of Bmw or any similar topic only for you Order Now BMW Group brand portfolio includes in addition to the BMW brand itself the Mini and Rolls Royce motorcars. The Mini brand is a remain from 1994 when BMW bought Rover and Rolls Royce was acquired in 1998 after a few years of engine cooperation.Besides the production of automobiles BMW is a well respected producer of motorcycles, with a production of 87. 000 units in 2009. Business units sectioning In our opinion BMW is a company which operates within two different business units; manufacturing and financial services. These units differ from each other and affect the value drivers differently. To get a fair valuation for BMW we have therefore chosen to make three different valuations, the third one being eliminations which represents the intra group transactions between the two business units.Regarding motorcycles, we have chosen to include them in the business unit we call manufacturing. For BMW, the sales of motorcycles contributed to 2,1% of annual turnover in 2009 which in itself does not constitute a large proportion of the annual turnover. It is our opinion that there are synergies in demand as well as revenues and costs that justifies including the valuation of the motorcycle part within the sales of cars and that it therefore is no need for a separate valuation of the motorcycles. Diagram 1 Sales of cars and motorcycles, Source: BMW Annual Report 2002-2009 Historical performanceWe have chosen to compare key figures for BMW, Diagram 2: BMW cars sales in different markets. Source: BMW Annual Report 2003-2009 Daimler, Volkswagen and Toyota collected from Morningstar. In our opinion, the most comparable competitor is Daimler, which includes the brands Mercedes, Smart and Maybach. Daimler produced 1,055 million cars in 2009 and has the majority of its factories in Germany, just like BMW. Further, Mercedes is one of the main competitors of BMW with a strong brand i n the premium car segment while smart is a competitor to Mini. The following chart describes the sales development for BMW within the last seven years.Worth noticing is how the sales peaked in 2007 with 1,5 million cars sold and how it has declined in overall numbers since then mostly due to declines in sales in Europe and America. The only market where sales have increased since the financial crisis is Asia and especially China and India. BMW can be divided into subgroups that represent different segments within the car industry. There are primarily two different series that represents the largest part of the automobile manufacturers sales. The BMW 3 series is the worldwide leader within its segment of middle class cars and competes with cars like Audi A4 and Mercedes C class.This is the cash cow for BMW and generates almost 40% of the total Revenues. The larger 5 series competes with cars like Audi A6 and Mercedes E-class. Comparing the Revenue Growth, Toyota and BMW excels, although Toyota have a major decline in revenue growth in 2009, whereas BMW and Volkswagen at least manages to decline sales by less than 10 percent. The fact that BMW with the highest percentage of premium cars sold has the lowest decline in annual turnover shows strength towards its competitors. Revenue Growth (total)| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 6,77%| 5,24%| 5,02%| 14,32%| -5,04%| -4,73%|Daimler| 4,11%| 6,15%| 0,96%| -34,56%| -3,06%| -17,99%| Volkswagen| 0,62%| 7,09%| 10,08%| 3,84%| 4,51%| -7,58%| Toyota| 11,32%| 8,54%| 14,36%| 13,36%| 9,04%| -21,40%| When assessing the different key numbers for the operating margin (OM) BMW remained high and steady at around 8% until 2008. Worth noticing is how Toyota outperforms most competitors until 2009 when they instead showed the poorest operating margin. For all compared companies, 2009 is the worst year and only VW and BMW are able to generate a positive OM. Operating Margin| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 8,4%| 8,1%| 8,3%| 7,5%| 1,7%| 0,6%|Daimler| 2,7%| 1,5%| 1,4%| 7,9%| 5,4%| -1,9%| Volkswagen| 1,8%| 2,9%| 1,9%| 5,6%| 5,6%| 1,8%| Toyota| 9,6%| 9,0%| 8,9%| 9,3%| 8,6%| -2,2%| When comparing the Inventory Turnover, Toyota is outstanding in its performance just as known to be. BMW had the second highest inventory turnover in 2009, which has improved continuously throughout the measured time (worst in 2004). For Daimler and Volkswagen the trend is instead negative. Inventory Turnover| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 5,60| 5,54| 5,65| 6,20| 6,06| 6,55| Daimler| 7,22| 6,86| 8,80| 4,73| 7,82| 4,41| Volkswagen| 6,80| 6,86| 7,26| 7,00| 6,07| 5,74|Toyota| 13,14| 12,51| 11,62| 11,21| 11,82| 11,28| The cash-conversion cycle within the industry is extremely volatile. Toyota, known for its excellent logistics, has been able to outperform most competitors. For BMW the figure is bleak although Daimler is in serious trouble with 117 days in its conversion cycle. Cash-conversion-cycle| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 47,20| 46,46| 45,63| 44,60| 52,18| 47,82| Daimler| 28,28| 30,14| 30,51| 82,19| 132,12| 117,78| Volkswagen| 40,44| 39,02| 35,45| 36,09| 34,36| 44,22| Toyota| 16,87| 16,45| 50,54| 49,04| 21,54| 28,18|A part of the cash-conversion cycle is th e receivables turnover, which indicates that BMW is performing well when it comes to collecting debt and efficiently using its assets. Once again Daimler shows worrying figures. Recievables Turnover| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 21,50| 23,31| 22,31| 22,73| 21,38| 24,35| Daimler| 21,80| 20,66| 20,25| 6,62| 4,06| 5,30| Volkswagen| 16,39| 17,33| 19,36| 20,28| 19,52| 18,04| Toyota| 11,49| 11,85| 5,94| 6,37| 12,89| 12,01| In conclusion BMW stands strong when benchmarking towards their main competitors.The high ROIC reveals that BMW historically has utilized its Invested Capital successfully, hence been able to create shareholder value since the WACC in the meantime has remained low. ROIC| 2004| 2005| 2006| 2007| 2008| 2009| BMW| 13,20%| 12,98%| 15,89%| 15,30%| 1,54%| 1,02%| Daimler| 2,24%| 2,51%| 2,80%| 3,97%| 1,36%| -3,36%| Volkswagen| 0,79%| 1,31%| 3,21%| 4,69%| 7,22%| 0,87%| Toyota| 7,71%| 7,07%| 7,15%| 7,31%| 7,13%| -1,88%| Porters five forces In order to assess the competition and profitability within the industry we have chosen to use the five forces model developed by Michael Porter.Our five forces analysis primarily set sights on the forces a ffecting the car industry and will not be further divided between different segments of BMW Group. The bargaining power of suppliers As car manufacturers has become more and more global through mergers and acquisitions the trend for suppliers has followed, where a few actors have become more dominant by acquiring smaller suppliers. When manufacturers grow, the bargaining power of supplier’s decreases and a small supplier might be solely dependent on BMW.In several cases these suppliers have established local assembly units near the car manufacturer’s production facilities in order to deliver just-in-sequence to the manufacturer’s assembly line which makes them more dependent. The merged suppliers stand stronger, but BMW is still in a good position to push prices. BMW takes advantage of their role as a global company and can adapt to best buys of components. In order to cut costs car manufacturers tend to outsource more. With several suppliers BMW has established a close partnership in order to co-operate in development and production of components e. . outsourcing. The bargaining power of buyers differs dependent upon the definition of the buyer. It is our opinion that the customers of BMW are not the retailers but the end users. While the retailers and BMW are equally dependent upon each other, they are both reliant on the choice from the end user. While low-cost carmakers worry about getting played off against each other (price wars etc), premium manufacturers worry that the value added by their design and the perception of their brand in relation to other luxury car manufacturers is inferior.Hence, the bargaining power for the buyer increases when the perception of BMWs cars gets worse in relations to others. Financial crises, switching costs and availability of substitutes can also affect the customer’s choice. Companies, such as taxi companies, buying larger volumes have a greater bargaining power in terms of price. For BMW, it is crucial to keep the incentives for the buyer to buy their car, hence not differ in price too much. Despite the fact that BMW are dependent upon their buyers, it is important to remain equivalent in the treatment and not to back down in negotiations in order to avoid dilution of their brand.Price sensitivity The threat of substitute products is quite limited, at least if we consider the BMW as a car to use for transports from A to B. Within a foreseeable future the car will still be one of our most used ways of transportation. Prohibition of cars, congestions charges and improved public transports are together indications that the horrible traffic situations in many cities are increasing the buyer’s inclination towards substitutes. High speed trains and air traffic is also increasing and can be seen as an alternative to longer distance travels by cars.However, when considering buying new BMW, one does not choose between the BMW and public transportation, but instead between a BMW and a car from one of their automobile competitors. In a broad view ICT could substitute for a car. In some way ICT substitute has in some way decreased the demand for travelling, videoconferencing has in some cases made travelling unnecessary. ICT and videoconferencing substitutes for a physical meeting, which sometimes requires travels by car. There will still be needs for physical meetings, and quite often they require travels by car.Even if a meeting can be held online the participants will most likely still have a car. The threat of substitutes to BMW as a premium car would probably not come from ICT or public transportation, but from other car manufactures which could possibly enters the premium car segment. Volkswagen launched its Phaeton to directly compete with BMWs 7-series and Mercedes S-class. http://www. quickmba. com/strategy/porter. shtml Threat of new entrants. The capital costs required to get established in the car manufacturing industry is exceptionally high; hence the possibility for new entrants to the car manufacturing industry must be considered low.Economies of scale also weaken the preconditions of new entrants in comparison to their established competitors. A threat of existing car manufacturers entering the premium segment or new geographical areas is instead considered higher (primarily Chinese manufacturers). Since luxury brands are able to charge a premium due to reputation, quality and design built over time, the conditions deteriorate further for new entrants. When Volkswagen launched VW Phaeton in 2002 they tried to compete with BMWs 7-series and Mercedes-Benz S Class. However the status of the Volkswagen brand had difficulties to compete with the two classic status brands.Customer loyalty, distribution channels and governmental and legal barriers are other difficulties needed to be handled for new entrants. Rivalry Between Established Competitors (Industry Rivalry) As a result of Mamp;A in the 90? s most competing brands are part of larger automotive groups. Audi is for instance a part of Volkswagen, Mercedes of Chrysler and Lexus is the premium brand from Toyota. The huge globalized nature of the industry creates a distinctive rivalry that takes place at both group and company level. Worth to notice is that BMW is only the 13th largest automobile manufacturer in terms of number of cars produced. In a survey made by Millward Brown, BMW overtook the first place as the world’s most valuable automotive brand from Toyota in 2010. As a premium brand with a history of quality and design, BMW has an important advantage over many competitors. At the same time, BMW has a lot to defend while other brands that also symbolize good quality are eager to catch up. Living on past achievements is not possible in the long run and in order to keep the positive trend it is necessary for the company to continuously improve in order to meet customer requirements.In 2009, a total of 51 million cars were sold, out of which BMW sold 1,26 million (2,47%) which makes BMW the 13th largest producer of cars that year. The largest car manufacturers are Toyota, GM and Volkswagen, which together accounted for almost exactly 1/3 of total cars sold worldwide in 2009. Diagram 3: Cars sold in 2009, divided by manufacturer. Source: OICA correspondents survey 2009 The financial crisis has made the automobile manufacturers more reserved when it comes to mergers and acquisitions (which was the clear trend in the 90? s). The trend has instead moved towards cooperation’s between the rivals in order to cut costs.BMW has signed a contract to assist SAAB with smaller motors, rumors have circulated about cooperation’s with archrival Mercedes when it comes to Ramp;D and Manufacturing and there is an ongoing partnership with Fiat concerning parts for Mini and Alfa Romeo. In order to capture the possibilities within the emerging market in China, BMW and their Chinese partner Brilliance China Automotive have launched a joint venture to support sales of BMWs using financial services. Although some car manufacturers have closed down due to the crisis, the market is still heavily saturated.There is a constant threat of over capacity and customer requirements are increasing. Requirements on environmental friendliness are also greater than ever and come with increased costs. Production of cars has become more globalized as a result of demands of cost-efficiency, which has increased continuously over the recent years. For BMW, the struggle for survival is in our opinion no longer about cutting down production costs, but instead of quickly introducing cars with the newest technology while preserving and strengthening its key brands by maintaining high quality and unique design.Competitors are of course aiming to do the same. A belief in increased investments is supported by historical data that estimates periods of roughly 25-30 years with a rising investment ratio after a financial crisis. To understand the industry one must look how its structure is changing. For more than hundred years cars have be running on petrol. Now, a technological race is taking place between car manufacturers in order to get the best technique for their future electrical cars. As usual when the technique is new, the development costs are high. A Chevrolet Volt sells for $40. 000 but costs $75. 000 to produce.To some this might seem like bad business, but in reality this is a much-needed expense to prepare for the business of tomorrow. For BMW, the ongoing research has resulted in cars like MiniE, an electric car that currently is tested out on the streets by many users. Another major investment is the Megacity Vehicle, which is a larger electrical car not launched yet and promoted under its own brand but with obvious similarities to BMW. For the industry as a whole, there is a risk of customers holding on car purchases until a â€Å"price war† will start or until the technology is more favorable (most importantly an increase in battery lifetime).As a premium car manufacturer, BMW might be able to avoid a price war, but customers can also choose to ignore the brand and luxury for the benefit of new technology. Price differences may decline due to cooperation’s and unwillingness by customers to pay more than the high price of electrical cars from less prestigious brands. This may mean that the option between low cost and product differentiation may be eliminated. SWOT Strengths The fact that BMW is one of the world’s most respected premium car brands constitute strength in itself.BMW holds a strong, non-overlapping, brand portfolio which stretches from the small youthful Mini to the super premium Rolls Royce. BMW communicates German engineering excellence, luxury and driving pleasure (their slogan is: The Ultimate Driving Machine), they do it well and are therefore a highly respected car manufacturer. BMW are renowned for their excellent self developed engines, especially the six cylinders. Later years they have advanced in their development of smaller fuel efficient four cylinder engines, which are used primarily in their smaller 1 and 3 series cars.A majority of the BMW engines are produced in their Austrian Steyer plant. The motors are sold to a variety of buyers beyond BMW and recently BMW signed a contract for delivering four cylinder engines to the next generation of SAAB 9-3. Through BMWs innovative and forward-looking technical development they should possess the ability to develop competitive future green automobiles. BMW has as the overall leader of the Dow Jones Sustainability Index positioned themselves with sustainability as an integrated part of the company.BMW have further more an in-house financing division which they can use to hedge for prices of raw materials and currency hedges. Being a worldwide company with production in many countries they also possess the possibility to benefit from natural hedges. Weaknesses Although BMW is a large auto manufacturer, the economies of scale available to producers of a larger numerous of less expensive cars is not available to BMW. Being mainly based in Germany, production and development is costly and shifting production to lower cost countries carries a risk of deteriorating the BMW brand.With only two main markets (America and Europe), BMW is exposed to a higher risk than more geographically diversified competitors. With a high indebtedness, BMW is also exposed to risks concerning higher interest rates which are expected in the future. Opportunities As one of the world’s leading premium car manufacturers, BMW has the opportunity to embrace emerging markets. When the demographics change and growth potential is good BMW should be able to take a descent share of the market. As an example, the growing middleclass in India (accounting for almost 300 million people) are experiencing an increase in purchasing power and embraces more and more western buying habits. With growing middleclass (currently 80 million people) in China, this market is also lucrative. China is the world’s largest market for automobiles and BMW with its strong brand has positioned itself with strategic alliances in order to gain market shares from this opportunity. During recent years demand for financial services has increased and will likely continue to do so.BMW offers extensive financial services and an increase in demand provides a possibility to expand their Financial Services to further diversify, while supporting production. BMWs best opportunities lie within the exploitation of emerging markets, stronger green profiling and offering financial services. Threats The price of raw materials is quite volatile and could be a substantial threat to the profitability of BMW. Another major risk is currency fluctuations, however as a global actor BMW have the ability to benefit from financial hedging as well as natural hedging.Higher requirements on emissions could form at threat to BMWs larger models with higher consumptions; however with new technology BMW should be able to handle this. The recent economic recession affected BMWs primary markets, US and Europe the most, and a return would most definitely constitute a serious threat to BMWs revenue. Heavily dependent upon their good reputation, BMW constantly have to deal with risks of bad publicity and rumors which could deteriorate the brand status. Forecasting amp; Keys Forecasting Q3 amp; Q4 2010 Our forecast of revenue growth in 2010 is based on the reported first quarters and analyst’s forecasts.We believe that BMW will return to the sales levels previous to the crisis during the coming two years (in 2007 1,5 million cars were sold) because the future prospect of the world economy is looking brighter, which the automobile industry is highly correlated with. BMW delivered 700  000 vehicles during H1 and several analysts believe that sales would rise about 10 percent compared to 2009, which means an increase to 1,4 million cars. Even though that delivered cars rose with 13,1 % in H1 2010, compared to the same period last year, we chose to use an increase of 12 percent during the whole year of 2010.BMW would then return to revenue figures and sales figures of 2008, â‚ ¬ 50 203 million respective 1,436 million, which is â‚ ¬ 50  186 million respective 1,440 million in 2010. Analysts expect that BMW’s EBIT margin will exceed 5 percent in the segment of automobiles 2010. However, since we assume that COGS will return to a level of 2005-2007 of 75 % of revenue, depreciation will be stable at 20 % of revenue. SGamp;A will return at 9,5 % of revenue (an average of 2005-2009), Ramp;D expenses will increase to 4,0 % of revenue (increase from 3,0 % due to higher investments in electric cars), and the EBIT margin will be 7,5 %.In order to estimate fiscal year 2010, we tried to find seasonality between the different quarters; however we did not find any pattern. Thus, we used data from Q1 and Q2 and made a prediction over the whole year. The balance sheet for 2010 is based on H1’s balance sheet including the retained earnings from 2009. The balance sheet has the advantage that it mirrors the present book value of the firm. Revenue assumption Revenue growth between 2010 and 2012 is based on the assumption that BMW will return and surpass revenue levels before the economic crises in 2008.Over 30 analysts following the BMW stock back this assumption. They estimate average revenue (billion) 2010: â‚ ¬56  510, 2011: â‚ ¬ 64  541 and 2012: â‚ ¬64  412. We believe it is possible that the world economy in 2013, 5 years after the financial crises, will enter a new Kitchin cycle. The Swedish minister of finance, Anders Borg, believes that a crisis could occur in 2013, otherwise the business cycle lives on overtime. This assumption will decline revenue with 5% 2013 and keep the economy steady in 2014. At the same time as the revenues decline, we believe that the COGS increase, which was the case during 2008-2009.Thereafter, in 2015, an increase of 7% and two years of relatively stable growth of 5%, somewhat better than G7 GDP growth and automobile industry. Auto manufacturers five years average return is 22,7%, this is an annual return of 4,5 %. We believe that BMW will outperform this average 2016-2017 and perform 4% in the steady state; this is very close to the history growth average of BMW during 1998-2009 of 3,95%. Recievables Turnover| E2010| E2011| E2012| E2013| E2014| E2015| World GDP| 4,77%| 0,42%| 4,54%| 4,59%| 4,62%| 4,62%| Advanced economies GDP| 2,71%| 2,17%| 2,64%| 2,59%| 2,51%| 2,41%| Major adv. conomies (G7) GDP| 2,51%| 2,04%| 2,54%| 2,44%| 2,33%| 2,20%| BMW revenue| Historical growth average 1998-2009: 3,95%| – Assumptions Keys / valuedrivers kapitalstruktur Cost of capi tal 1. Assumptions amp; Calculations Leases We have assumed that the leasing brought up on BMW’s balance sheet is the leasing when BMW acts as the lessor. We have therefore chosen to capitalize BMW’s leasing, when acting as a lessee (found in notes). The asset life is set to 15 years as the leases includes items such as machinery and buildings, and therefore should have a longer asset life than Lim, Mann and Mihov’s recommendation of 11 years.When later forecasting, leasing is forecasted as a percentage of revenue. Research amp; Development Research amp; Development, depreciation and amortization were included in COGS and we therefore chose to separate these in order to fairly valuate them. (SKRIVA OM VARFOR INTE capitalisera Ramp;D? ) Cost of Capital Since BMW is divided into three different business units with unequal capital structure and various betas we have chosen to calculate three different WACC’s. The Betas are calculated through five year monthly stock returns versus MSCI World index. These Betas are then unlevered by dividing them by each company’s D/E ratio. equity=? unlevered1+DebtEquity Then we calculated an average unlevered industry Beta which then was weighted to each company’s D/E ratio to obtain an industry adjusted company Beta. ?unlevered=? equity1+DebtEquity The risk free rate is the same for all three units and is determined by using a 10-year German Eurobond which offers high liquidity and low credit risk in the same period as our forecast. Estimating the market risk premium, the difference between the markets expected return and risk free rate, is difficult to assess since the expected return on the market is unobservable.We have chosen a market risk premium of 5% for all units based on historical data. CAPM| Group| Manufactoring| Financial Services| Eliminations| Risk-free rate| 2,25%| 2,25%| 2,25%| 2,25%| Beta| 1,386| 0,693| 1,470| 1,405| Market risk premium| 5%| 5%| 5%| 5%| Cost of equity| 9,18%| 5,71%| 9,60%| 9,28%| Furthermore, w e have used a tax rate of 30,2 % during the entire analysis since the overall corporate tax rate are 30,2 % in Germany. Since the tax rate for companies outside of Germany vary from 12,5% to 46,9% this number is a fairly good average which also complies with the tax rate during previous stable years. Further on the cost of capital was set by a BMW corporate bond which is due in 2018. The target capital structure for manufacturing was based on the capital structure for the entire company. According to Appendix X BMW Group has a structure of 68% debt, but since this includes financial services with a significant higher percentage debt, we have chosen to use a target capital structure of 65% for manufacturing. Since the capital structure of Financial Services has been relatively constant we have based the debt-equity ratio on the mean value.Considering eliminations, we have assumed that they have the same capital structure as the company as a whole. WACC| Group| Manufacturing| Financial Services| Eliminations| D/(D+E)| 32%| 35%| 23%| 32%| E/(D+E)| 68%| 65%| 77%| 68%| Tax| 30,2%| 30,2%| 30,2%| 30,2%| Rd| 5%| 5%| 5%| 5%| Re| 9,18%| 5,71%| 9,60%| 9,28%| WACC| 5,48%| 4,27%| 4,91%| 5,34%| Pitch Emerging markets: A few of the world’s largest countries by population are Brazil (191 million), China (1,335 billion), India (1,199 billion) and Indonesia (232 million).Estimations predict a radical growth in GDP per capita for these countries in the coming years, as shown in the chart below. We believe that the market for premium cars in those countries will increase with the growth in GDP. Recently, Volkswagen group announced that their revenue in India increased with 132% on the first 3 quarters of 2010 compared to the year before. The upper class in India accounts for about 1% of the population, and the new middle class constitutes about 20%. A reasonable assumption that 5% of the population in the above stated countries can afford a BMW, equals a potential market of 150 million potential buyers.In accordance with our predicted revenue growth, we have chosen to illustrate the origin of our growing sales. According to our predictions, Asia will become the major market for BMW within a few years. Further investments in these emerging markets, in order to generate a better position, will create higher sales volumes and profits. With new factories in India and China (one more is planned) and cooperation’s with retailers and joint-ventures, BMW has built a foundation upon which they can grow.As our competitive analysis has highlighted, electrical and hybrid cars will replace cars with internal combustion engines. Although estimations differ widely, a probable scenario is that electrical cars will be the leading technology within a 20-year period. China is expected to become the largest market for electrical cars and the government is subsidizing the development of new technology both in China and the U. S. A. China is expected to be the largest market for electric vehicles, with predictions suggesting more than 888,000 will be sold in the nation over the next five years. Sensitivity analysis Since the manufacturing unit represents more than 88 percent of BMW’s total revenue our sensitivity analysis is conducted on changes in that specific unit. Furthermore our analysis is performed mainly on the variables COGS, revenue and the WACC since these are the variables that are most important for the company’s stock price and thus the equity value. The two dimensional tables below show how increases in these variables affect the stock price. From the tables it can be seen that WACC and COGS has the most influence on the stock price. How to cite Valuation of Bmw, Papers