The best way to profit from the rise of the electric car
Electric cars are set to come into their own in the next ten years or so. Here, Ed Bowsher picks the best-looking stock in the sector.
You don't often see a CEO admit that his company is over-valued.
But Elon Musk, the boss of the electric car wonderstock, Tesla (Nasdaq: TSLA), did precisely that last week. He told a press event that his company had a higher valuation than we have any right to deserve.'
Now I'm a fan of electric cars. I think they have a big future. But I fear that Musk is right. Tesla's share price is too high. In fact, my colleague Matthew Partridge suggested you sell and take profitsa few weeks ago.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, I've found another way to invest in the potential of electric cars. It's a company you've definitely heard of and it looks rather cheap.
This well-known company could lead the electric car race
BMW
You see, with BMW, you get a strong core business manufacturing traditional cars. Then, on top of that, you get a very promising electric car business as well.
BMW's first all-electric car is going to hit car showrooms next month. It's called the i3 and it's a compact city car aimed at younger drivers.
Despite the younger target audience, the idea is that the i3 should have as much cachet as a conventional BMW. The simplest version will cost around £25,000. The car has a maximum driving distance of between 80 and 130 miles before you'll need to recharge your battery.
I've seen several positive reviews in the motoring press and BMW has already received 8,000 pre-orders for the car.
I think there's a strong chance that electric cars will take off over the next ten years and BMW is well placed to benefit. No other manufacturer, apart from Tesla, has produced an electric car that is generating this level of excitement.
And BMW's core business is performing well too. Total sales, including the Mini and Rolls Royce brands, may even hit two million vehicles for the first time this year.
BMW's great achievement over the last decade has been to broaden its product range whilst not damaging its strong brand. So the company still appeals to the super-rich even though it now has a model that competes with the Ford Focus. (That low-end' model is the 1-series.)
Above all else, it's this strong brand which differentiates BMW from so many of its rivals.
Why I've always avoided investing in car companies
Secondly I worry that too many car manufacturers are receiving either covert or overt support from governments (which is one reason there's so much over-capacity). In other words, the auto market is not one with a level playing field.
But BMW's strong brand means it can cope with both of these challenges. Customers are prepared to pay a premium price for a BMW even if other manufacturers are basically dumping vehicles at super-low, unprofitable prices.
You might counter by noting that BMW's operating profit margin has fallen by about 2% over the last couple of years it's now at 9.6%. But that's not because BMW is having to cut prices in the showroom. Rather it's a case of extra spending, which is going on developing new electric cars as well as other research and development work.
I'm not too worried about this declining margin, because it reflects increased investment which should hopefully generate bigger returns for investors in the future.
What's more, I think BMW looks surprisingly cheap. At a share price of €81, the company is trading on an historic price/earnings ratio of just ten.
I also like the fact that BMW is still pretty much a family business - 47% of the shares are owned by the Quandt family. Family businesses tend to be good at investing for the long-term, and don't get distracted by short-term problems.
BMW has certainly pursued a long-termist strategy for at least the last 40 years, and with the launch of the i3, it looks like that strategy is set to continue.
Our recommended articles for today
Three things I learned from the Great Storm of 1987
This man wants to sell Colombia's family jewels
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Ed has been a private investor since the mid-90s and has worked as a financial journalist since 2000. He's been employed by several investment websites including Citywire, breakingviews and The Motley Fool, where he was UK editor.
Ed mainly invests in technology shares, pharmaceuticals and smaller companies. He's also a big fan of investment trusts.
Away from work, Ed is a keen theatre goer and loves all things Canadian.
Follow Ed on Twitter
-
How to invest in nuclear power
We need nuclear power to go green, says Dominic Frisby. But there is a better option than huge power stations
By Dominic Frisby Published
-
Chase slashes its easy-access savings rate – is it time to switch?
The Chase easy-access savings account has proved popular with savers thanks to its competitive rate and bonus deals. But, as the rate has dropped, has it lost its charm?
By Katie Williams Published