The German car industry on the brink?

 

The German automakers – once the cornerstone of the economy, the flagship for „Made in Germany“. German cars were the gold standard of the automotive industry, all of Asia dreamed of one day owning a new Mercedes. A mythical entity, the ultimate status symbol. But times changed: financial crisis, emission standards and environmental awareness, Diesel-Gate and managers who slept through the changing times. For 20 years, the share prices of the German giants BMW, Volkswagen and Daimler have been stagnating, while Tesla's value increased tenfold in the last 2 years. Meanwhile, Tesla's market value is 5 times the combined value of VW, BMW and Daimler at one-twentieth of the revenue. Are the traditional automotive groups now finally written off?

 

High Investments

Research and development expenses of Daimler and BMW as % of cash flow.

In our ESG data, there is also a breakdown of research and development expenses. After largely letting the early developments of the mobility transition pass them by, they began in 2012 with full concentration to adapt to the changed circumstances. The restructuring and reorientation weighed heavily on the balance sheets. Rising costs, collapse of margins and growth. Daimler in particular was hit hard.

 

Glimmer of Hope in Cash Flow

Daimler: Development of cash flow, costs and margins.

Accordingly, the share prices also didn't budge despite the favorable stock markets. But improvement is emerging. The cash flow, often an early indicator, of the last year shows clear glimmers of hope for better times. The share prices have also been able to develop unusually well in the last 12 months. A dynamic can currently be discovered in this area that was missed in the last decade. Quite logical, upon closer examination. The uncertainty of recent years about where the new era of mobility is heading has largely dissipated. Much has been tried and more or less discarded (e.g. car sharing), other things have prevailed (e.g. autonomous driving). This has made the risks as well as the opportunities calculable and the sector overall a significantly more attractive investment.

 

Technical Chart Music

The price development of VW, Daimler and BMW in the last 20 years. BMW with a technically attractive setup, Daimler with strong momentum from the Corona crash.

The Germans have certainly used their time and investments well. According to initial reports, they could at least formally overtake Tesla in terms of autonomous driving this year. If the relevant law has been passed by then, Daimler wants to equip the S-Class with an assistance system this year that explicitly allows the driver in certain situations to give the car full control and occupy themselves with other things. In terms of driving assistance and emergency assistance, Tesla still has the edge, but this lead has now shrunk to just a few points.

 

Growth or Perhaps Value After All

Russell 3000 Value vs Growth.

In addition, the value environment is showing signs of life. After a decade of hype around growth stocks, another attempt is currently being made to shift the trend towards value stocks such as the cheap and stable dividend payers VW, BMW and Daimler.

 

Conclusion

The German automotive industry is not on the brink, on the contrary. Much suggests that the worst years are over and the future looks significantly better than the past. Tesla is likely to join the established giants as an equal player. With a value of 750 billion for Tesla and 62 billion for Daimler, a price adjustment is likely. Not least as diversification in a portfolio full of Amazon, Google and Netflix, the German automakers are an interesting choice to hedge against a shift from growth to value.

The choice of stock is as individual as its drivers. VW, the largest and strongest of the three, came through the crisis comparatively well and is preparing for a breakout from the sideways movement of the last decade. Stable and calm, the Golf. BMW pushes forward volatilely against all adversities and shows a quite interesting technical setup with the breakout from the flag consolidation since 2015. Nice to trade with a stop loss at 60 – 65 € and a target towards triple digits, if not significantly higher. Technically fine, the 3 Series. Daimler was hit the hardest, invested the most in the reorientation and clearly shows the strongest recovery after Corona. Latently megalomaniacal but in case of success the stars are the goal, the S-Class. Elon Musk, by the way, fits wonderfully into this analogy. Incredibly fast but one misstep and it blows up in your face: the rocket.

 

Lars Wißler owns shares of Daimler AG, BMW AG and Volkswagen AG. PWP Leeway does not own any of the mentioned stocks.