How to trade these four household names
Our commentator, author and columnist looks at investing in something few of us could do without.
6th March 2019 12:48
by Rodney Hobson from interactive investor
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Our commentator, author and columnist looks at investing in something few of us could do without.
Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.
Is there light at the end of the tunnel or is that a car's headlights coming towards us? European carmakers have had a bumpy ride over the past few years, some of it of their own making, but they also face considerable headwinds from threatened US tariffs and a possible disruption to markets from Brexit.
So the Geneva Motor Show, the largest of its kind in Europe, opened this week against a tough background of potentially falling vehicle sales, particularly of diesel cars, and the scaling down of Japanese car manufacturing in the UK. For investors, the sector represents a battle of hope versus adversity.
On the eve of the show, Volkswagen (XETRA:VOW) chief executive Herbert Diess warned that US tariffs on imported vehicles would cost his company €2-3 billion. EU Trade Commissioner Cecilia Malmstrom is to head to Washington in the next few days to try to head off tariffs that could be as high as 25%. US President Donald Trump and European Commission President Jean-Claude Juncker had agreed last July to reduce industrial tariffs and trade barriers, but Trump is notoriously quixotic in his dealings with friends and foes alike.
Source: interactive investor Past performance is not a guide to future performance
Daimler (XETRA:DAI) warned last month of a "challenging" year ahead for the industry after the Stuttgart-based company reported sales in January down 6.7% compared with the same month last year as buyers tailed off in the European and US markets. China was the only market where Daimler did better that month. Similarly, Volkswagen expects to face headwinds in 2019 after suffering €3.2 billion in extra costs arising from the diesel emissions scandal and problems conforming with new lab tests.
Source: interactive investor Past performance is not a guide to future performance
These two German companies experienced contrasting financial fortunes last year. Daimler saw net profits fall from €9.61 billion to €6.78 billion despite increasing sales from €164.2 billion to €167.4 billion.
Volkswagen managed a decent showing with sales up from €229.5 billion to €235.8 billion and pre-tax profits increasing from €13.7 billion to €15.6 billion. In total, Volkswagen and its subsidiaries delivered 10.8 million cars to customers in 2018, 0.9% more than in the previous 12 months.
BMW (XETRA:BMW) achieved record sales of 2.49 million BMW, Mini and Rolls-Royce vehicles last year. However, profits were way down on 2017 and margins were increasingly squeezed as the year went on.
Source: interactive investor Past performance is not a guide to future performance
Meanwhile, Peugeot (EURONEXT:UG), the French maker of Peugeot, Citroen and Opel Vauxhall cars, reported net income up 47% to €2.83 billion, with sales increasing by 6.8% to 3.9 million vehicles and margins improving.
Source: interactive investor Past performance is not a guide to future performance
Automated driving technology is clearly the future, but developing it will be expensive and many manufacturers risk being left behind in a rapidly changing world. Working together will save money and speed up the process, so German rivals BMW and Daimler are joining forces to develop technology for self-driving vehicles, as well as advanced driver assistance systems such as parking aids, but even so the next phase of development may not be widely available until 2025. It is worth watching out for more of these partnerships over the coming months.
Daimler looks on the surface to be the most attractive investment, at €53 offering a yield of 6.85% and trading on a tiny price/earnings (PE) multiple of 7.86. However, those ratios reflect the fear that Daimler may struggle most among European carmakers this year.
Volkswagen at €157 yields 2.48% and has an even less demanding PE of 6.01, while BMW's corresponding figures are €75, 5.35% and 6.08. PSA shares stand at €22.80, giving a yield of 2.37% on a PE of 7.44.
Hobson's choice: I would not buy Daimler as it looks the most vulnerable. Buy BMW below €80 and Volkswagen below €165. PSA is worth considering but looks fully valued for now.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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