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Saturday, November 2, 2013

Investment Idea - German Car Makers + Italy's FIAT

When I started looking at European stocks in the 1st quarter of this year it really surprised how cheap these companies were selling from a valuation stand point. Being a follower of Philippine stocks on the period when we were on the relentless rally towards the 7000-and-beyond levels, the spread between the earnings multiple, price to book, dividend yield etc between PHL and EU stocks to me was just too wide (PHL being expensive and EU being cheap). Now one could argue that PHL was expensive for a reason (potential growth) and EU was cheap for a reason (contracting economy) but that would be subject to an entirely different debate and will most likely end up not really knowing who's right or wrong, so to simplify things let's just take the numbers as they are, what's cheap is cheap and what's expensive is expensive. =)

Having this said, back then I really had the conviction that there is a compelling case for a long term investment on these EU stocks and damn If only I had the access (and capital LOL) to the Europeans stock exchanges I would have bought them right upfront hahaha! :D Anyways, back to the point of this article, here's the analysis I made during 1st quarter this year. 

**Analysis was made on 11-Apr-13.**

We were thinking that we take this recent correction on the European markets to position ourselves on German car-makers, BMW GR, VOW GR, DAI GR and Italy's F IM. See some fundamental and technical reasons below.

1. Attractive Valuations:

German Car Makers:

2. Very high barriers to entry and very strong brand equity:

High end car manufacturing requires very huge capital. New players who attempt to venture in this game could loose their money even before they start selling their first car. Not to mention that they still have to build their brand equity to actually be a prominent player in this area of the car markets. Having this said, the above names already have a very strong brand equity built through the years and is already even part of history. They are selling their cars under the brands, BMW, Porsche, Bentley, Ferrari, Rolls Royce, Mercedes, Lamborghini, AUDI, Bugatti, Maserati etc. you name it. It seems all the high end names are already covered in the the four stocks mentioned.

3. We ask ourselves, are these brands going to exist in the future? Will they continue selling their cars? Will people have the money to buy their cars?
We think this is a resounding Yes. In this world, no mater what happens there will always be rich people who want to buy luxury and high end products. And since they are rich, if they choose to buy these cars, they will most likely have the money to buy them. The idea is your target market will most likely have the capacity to buy your high end product regardless of what the economy is doing.

4. Increasing Revenues and Global growth:
Contrary to what the market perceives, the above names are actually experiencing increase in revenues in their European operations last 2012 and aiming to increase it even higher this 2013.

Not to mention, that they are also expanding their retail outlets to Asia (this is even visible already in the Philippines). We think that this will greatly improve the certainty of their earnings and future cash flow since revenues will be coming in from various regions around the world. Also, due to the increasing numbers of wealthy Asians, we think that they will most likely buy these German and Italian car brands as these names are recognized internationally and is known for their good quality and an engineering second to none. An article below also points our the the luxury segment of China is dominated by the traditional German car maker names under these four stocks.

To add a nail to the coffin. We also think that the Chinese will mostly favor buying the European made cars over Japanese cars due to the territorial dispute between China and Japan w/c should be beneficial for the German/Italian car makers. =)

5. Recent drop in stock prices:
All of the stocks mentioned experienced a 11% to 17% drop in stock price from their very recent high. Please see attached charts.

SUMMARY:We will be buying an essential business with wide economic moat and is on a sweet spot of the car manufacturing/selling industry with very strong brand equity, very high barriers to entry at cheap prices plus with a potential growth in revenues from Asia w/o necessarily spending more because all they have to do is bring the cars to Asia and sell it.

**END of Analysis**

So when I crunched the numbers and compute how much was the potential return I would get assuming I bought the stocks mentioned above on the day of the analysis (11-Apr-13) it actually outperformed the European indices by 10 to 15% and outperformed the PCOMP by a whooping 33%! Bah! And to think that my personal portfolio is even underperfoming the PCOMP this year, I would really be in a better place had I bought the German Car Makers + Italy's FIAT portfolio. Hahaha!

Anyways, I think my lesson here is that there is beauty in having the capability to invest in global stock markets and not just in the Philippines alone. I'd be definitely be adding "get an offshore broker" in my bucket-list. There's a lot of work and saving to do. Haha!

Cheers! :D

This is not an investment advice and the author shall not be responsible or liable for any trading or investment decisions made based on this information.
The author hereby expressly disclaims any responsibility for any error or inaccuracy in the information.


  1. what's the status of your local portfolio/positions?

    1. I will be posting it in a few days. Stay posted. :)

    2. Here's the update: http://www.filipinoinvestor.com/2014/02/the-year-that-was-and-year-that-will-be.html