Weekly Stocktake with Danyaal
17 March 2023
|Index / Fund / Rate||Start of Year||Last week||This Week||% change YTD|
|JSE ALSI||73 049||76 454||72 528||-0.71%|
|NASDAQ Composite||10 467||11 139||11 631||11.12%|
|S&P 500||3 840||3 862||3 917||2.01%|
|Prime Lending Rate||10,50%||10.75%||10,75%||2.38%|
|Lunar BCI WW Flexible Fund||141,43||153.41||152.25||7.65%|
|Brent Crude ($’barrel)||85,95||82.68||72.52||-15.63%|
Rev Your Engines
Last week, three major German automakers; Volkswagen (VW), BMW, and Mercedes-Benz; announced their results. BMW (which also owns Mini Cooper and Rolls Royce) and Mercedes cater to the upper-income market by primarily selling luxury vehicles, while VW attempts to sell to both the broad market and the premium market. VW’s in-house brand offers a variety of vehicles to different groups. Its other brands, including Porsche, Bentley, Audi, and several other vehicle manufacturers, are primarily focused on selling premium products to higher income groups.
In the 2022 financial year, VW reported a sales revenue of €279.2 billion, a 12% increase from the previous year. Their operating profit was €22.5 billion, resulting in an operating margin of 8.1%. The volume brands, including VW, Skoda, and Seat, had the largest revenue of €113.8 billion, but it only had an operating margin of 3.6%. The premium brand segment, which consists of Bentley, Audi, Lamborghini, and Ducati, had a revenue of €61.8 billion and an operating margin of 12.3%. In contrast, BMW had a revenue of €142.6 billion in the 2022 financial year, with an operating margin of 9.8%. Meanwhile, Mercedes-Benz recorded a revenue of €150 billion and an operating profit of €20.5 billion, resulting in an operating margin of 13.6%.
These vehicle manufacturers face the challenge of dividing their capital expenditure between two key areas – the Internal Combustion Engine vehicles (ICE) and Electric Vehicles (EV). Investment is split between maintaining and developing the ICE segment, which is crucial to retain their existing customer base; and investing in the future of EV, which is important to attract new customers. This could be one of the reasons these companies are trading at quite low earning multiples. The table below compares the historic earning multiples of these vehicle manufacturers.
|Company||Price/Earnings at Close of 17 March 2023|
In contrast, Tesla’s sole focus is on EV production, giving them an advantage in how they allocate their capital expenditure. This is one of the reasons why Tesla has gained significant market share in the EV space. Their earnings multiple is also significantly higher than the other companies.
VW and BMW are held in the Lunar Capital Offshore Portfolio.
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