Here’s What I Like in the German Auto Sector

German auto sector

Earlier this week, I discussed winners and losers in the German auto sector. Today, I want to offer a small recap on this sector. I know that U.S. auto companies are facing challenges due to semiconductor shortages and labor issues. Perhaps it is time to consider a few of the rivals across the Atlantic. All of these stocks trade in the U.S., but you might need to do so over the counter. Don’t worry. That’s not an issue for companies that are this large and this liquid around the world. Let’s start with Daimler.

A Solid “First” Effort

Daimler (OTC:DMLRY) is a leading global manufacturer of premium passenger cars and the world’s No. 1 in commercial vehicles, with Mercedes-Benz Cars, Daimler Trucks, Daimler Financial Services, and Vans & Buses divisions. The company closed the 1st quarter with significant revenue increases, operating profit, profit, and unit sales. The Group sold a total of 728,600 vehicles. Daimler also expects significant increases in revenue, unit sales, and earnings for the entire year. The Group understands “significant” to mean more than 10%.

The margin targets for the two divisions are 10% to 12% and 6% to 7%, respectively. The forecast considers the continuing shortage of semiconductors, which could also lead to production losses in the 2nd quarter. An improvement is not expected until the 2nd half. However, some voices assume that the shortage will last for years. If, on the other hand, the problem is resolved sooner, the targets are too conservative.

In addition to improving profitability, e-mobility is an important topic. The entire Mercedes-Benz fleet is to be electrified as early as 2022. Strict cost control should contribute to higher profitability and the planned spin-off of Commercial Vehicles with a subsequent IPO. This will reduce the complexity of the Group.

On the other hand, the high free float increases the risk of Daimler Cars & Vans becoming a takeover target. The stock market well received the quarterly figures and spin-off plan. Pay close attention to this company in the German auto sector. If it captures momentum, it has lots of room to run.

BMW: A Profitable Growth Track

With its brands BMW, Mini, and Rolls Royce, the BMW Group (OTC:BMWYY) is one of the world’s leading manufacturers of cars in the upper price segment. Motorcycles and financial services round off the product range. The Group operates 28 production plants in 13 countries and a global sales network with agencies in over 150 countries.

With revenue growth of 15.2%, profit increased fivefold in the 1st quarter. At 9.8%, the operating margin in the Auto Division was within the target corridor defined for the long term. Sales increased by a third to 636,606 vehicles. Thanks to successful cost-saving measures, sales and earnings were driven by good business in China and greater efficiency. In addition, the Group had to grant fewer discounts and was, therefore, able to achieve higher prices.

In the further course of the year, management expects burdens from rising raw material prices and the continuing semiconductor shortage. Accordingly, the annual target of an operating margin in the Auto Division at the upper end is 6% to 8%.

The BMW Group is making progress in e-mobility. In Q1, sales of electrified vehicles more than doubled to 70,207 units. Against this backdrop, BMW expects to fall below the CO2 limits in the E.U. even more significantly than in 2020, although it still has to buy certificates in China and the U.S.

By 2025, the Group aims to increase sales of fully electric vehicles by more than 50% annually with a continuously expanding model range. At the same time, BMW is developing more cost-effective and sustainable solid-state batteries and is pushing the expansion of the private and public charging infrastructure. In the process, 100% of the power supply will come from renewable energies.

The stock is again outperforming the DAX and is not yet too expensive by historical standards.

V.W. Faces Bottlenecks

The Volkswagen Group (OTC:VWAGY) is Europe’s largest manufacturer, producing almost 10 million cars. Its most important sales market is Germany. The Group includes the Audi, Bentley, Bugatti, Lamborghini, Seat, Skoda, Porsche, and Volkswagen passenger car brands.

This German auto sector Group also offers financial services. The Commercial Vehicles division with the Scania and MAN brands was floated on the stock market under the name Traton.

Sales increased by 13.3% and unit sales by 20.5% to 2.33 million vehicles. Profits increased eightfold, and the operating margin improved from 1.6% to 7.7%. The Group has also become financially stronger. Net liquidity increased by around two-thirds to €29.65 billion and automotive cash flow from €(1.5) billion to €(5.5) billion. Sales and earnings were driven by good business in China, improved product mix, positive effects from the valuation of raw material hedges, and lower fixed costs. Restructuring charges had only a minor negative impact.

Sales of electrified vehicles more than doubled to 133,000 units. For the full year, management has forecast significant sales growth and an operating return on sales of 5.5 to 7%. The target for the core V.W. brand is 3 to 4%. Sales are expected to significantly exceed the previous year’s level of 9.16 million vehicles.

Of the electrified vehicles, the new ID 4 battery-powered SUV could become a box-office hit. V.W. is increasingly relying on its own plants for battery production. The platform model is being expanded accordingly. V.W. is a core investment in the automotive sector. Risks are the ongoing semiconductor shortage and rising raw material prices. An interesting move would be an IPO of the Porsche brand, which would then show its true value.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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