Shares of automakers are suffering as investors fret over a potential recession and falling car sales. It’s an opportunity for deep-pocketed funds or backers to steer them out of public markets altogether, writes Unmack1 BVPredicts
, BMW and Stellantis are trading on average at 5 times forward earnings, a roughly 25% discount to their 10-year average.
True, a 2023 recession may depress demand for vehicles and cut prices. Yet the outlook is far from bleak. Auto groups sold fewer cars in recent years due to the semiconductor shortage, and so are not the bloated beasts they once were. The same four carmakers are expected to grow revenue by 3% a year through 2024, according to Refinitiv data, a far cry from the more than 10% annual declines seen in 2009.
One way to profit from the depressed valuations is to buy back stock. BMW, for example, has a 2 billion euro repurchase programme, but has the authority to retire up to 10% of its shares in coming years. Assuming that the controlling Quandt family doesn’t participate, its stake will rise. More companies may follow BMW in 2023.
A bolder move would be to delist a company altogether. There are risks: Carmakers are loath to borrow too much, for fear of damaging their financial services divisions. Yet the sector is also sitting on cash: BMW, for example, will in 2023 have net cash equivalent to 47% of its market capitalisation in December, according to Refinitiv data.
Assume a private equity buyer teamed up with the Quandt clan and acquired minority investors’ shares at a 25% premium, using debt, for 37 billion euros. After netting off cash, BMW would only have around 10 billion euros of borrowings, which is less than half of forecast 2023 EBITDA and not much more than its medium-term free cash flow target of almost 7 billion euros. That implies the buyers could pay off the debt fast and subsequently extract hefty dividends.
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