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Valuation of BMW
- Financial & Strategic Analysis
Authors Rasmus Ramshj Plen Exam no. 282821 BSc (B/IM) Mikkel Kronborg Olesen Exam no. 283755 BSc (B)
TABLE OF CONTENTS 1 PREFACE ................................................................................................................................................................ 4 1.1 1.2 1.3 1.4 1.5 1.6 2 EXECUTIVE SUMMARY ................................................................................................................................................ 5 BRIEF INTRODUCTION ................................................................................................................................................. 6 PROBLEM STATEMENT ................................................................................................................................................ 8 STRUCTURE .............................................................................................................................................................. 9 DELIMITATIONS AND ASSUMPTIONS ............................................................................................................................ 10 METHODS .............................................................................................................................................................. 12
HISTORICAL FINANCIAL ANALYSIS........................................................................................................... 13 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 REARRANGING THE BALANCE SHEET - ANALYZING INVESTED CAPITAL .................................................................................. 13 REARRANGING THE INCOME STATEMENT ANALYZING NOPLAT ...................................................................................... 14 ANALYZING THE FREE CASH FLOW .............................................................................................................................. 15 REINVESTMENT RATIOS ............................................................................................................................................. 16 RETURN ON INVESTED CAPITAL (ROIC) ........................................................................................................................ 16 ANALYSIS OF REVENUE GROWTH ................................................................................................................................. 17 CAPITAL STRUCTURE OPTIMAL CAPITAL STRUCTURE .................................................................................................... 18 PEER GROUP FINANCIAL RATIOS .................................................................................................................................. 20 CONCLUSION ON THE FINANCIAL ANALYSIS ................................................................................................................... 21
THE COST OF CAPITAL ................................................................................................................................... 21 3.1 3.2 3.3 3.4 3.5 ESTIMATING MARKET VALUE WEIGHTS & TAX .............................................................................................................. 21 ESTIMATING THE COST OF EQUITY .............................................................................................................................. 23 THE CAPM EQUATION............................................................................................................................................. 24 ESTIMATING THE COST OF DEBT ................................................................................................................................. 28 CONCLUSION .......................................................................................................................................................... 29
EXTERNAL STRATEGIC ANALYSIS ............................................................................................................. 31 4.1 4.2 4.3 THE DEGREE OF TURBULENCE .................................................................................................................................... 31 PEST .................................................................................................................................................................... 32 PORTER S 5 FORCES ................................................................................................................................................ 37
INTERNAL STRATEGIC ANALYSIS .............................................................................................................. 43 5.1 5.2 5.3 5.4 5.5 TANGIBLE ASSETS .................................................................................................................................................... 44 INTANGIBLE ASSETS .................................................................................................................................................. 44 ORGANIZATIONAL CAPABILITIES .................................................................................................................................. 45 MC KINSEYS 7S MODEL ........................................................................................................................................... 46 EVALUATION OF INTERNAL RESOURCES......................................................................................................................... 49
6 7
KEY FACTORS OF SUCCESS (KFS) ............................................................................................................... 51 SWOT ANALYSIS ............................................................................................................................................... 52 7.1 7.2 PRIORITIZING BMWS STRATEGIC CHALLENGES ............................................................................................................. 52 CONCLUSION ON THE STRATEGIC ANALYSIS ................................................................................................................... 55
FORECASTING AND VALUATION................................................................................................................. 57 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 FORECAST DRIVERS .................................................................................................................................................. 57 SHORT TERM FORECAST FOR THE INCOME STATEMENT .................................................................................................... 58 SHORT-TERM FORECAST FOR THE BALANCE SHEET.......................................................................................................... 61 LONG TERM AND CONTINUING VALUE FORECAST DRIVERS ................................................................................................ 62 VALUATION ............................................................................................................................................................ 63 DIFFERENT STOCK CLASSES......................................................................................................................................... 64 SENSITIVITY ANALYSIS............................................................................................................................................... 66 PRELIMINARY CONCLUSION........................................................................................................................................ 69
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1 Preface
This report was written for an academic audience, where pre knowledge about basic economic terms is assumed. Still economic terms will be written out, when the reader is introduced to them for the first time. In order to ease up the access to this report, the structure has been visualized in appendix one in the back of the report. Along the report comes a CD with a copy of the report and all the relevant spreadsheets, which have been used for the valuation. The spreadsheets have been created from scratch instead of using a standardized spreadsheet, which can be bought from e.g. McKinsey. This has been done in order to get comprehensive understanding of the companys accounts and the reorganization of financial statements. Reading the report without having to look forth and back has been a major concern for the writers, which made it a necessity to include a PowerPoint Slide Show consisting of the appendixes, which can be used while reading. It is therefore recommended to keep the slideshow open on the computer while reading. The length of the report is within the limits given by the Aarhus School of Business for a Bachelor project for two persons (Appendix 14).
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premium car industry. The negative impact was due to the threat from new potential entrant from emerging markets. The internal analysis concluded the sustainable competitive advantages to be: Branding, Innovative capabilities and the experience with sustainable solutions. In order to combine internal and external factors, key factors of success were looked at. Finally in the strategic analysis, the factors from the internal and external analysis were brought together in a SWOT analysis. The most important strategic factors were combined in order to identify BMWs strategic position. The critical SWOT analysis concluded that BMW was not in a situation where changes were needed immediately. After the SWOT analysis, the actual valuation was taken care of. First, forecast drivers were estimated on the basis of the strategic and historical analysis. Second the forecast drivers were used to establish values for free cash flows and economic profits. The result of the valuation was a market value for equity of 31,968 mio. . The equity value was used in a valuation of the two different stock classes. Before the valuation of the stock classes could be undertaken, the price differential between the stock classes was explained. The valuation gave a preferred stock price of 35.70 and a common stock price of 50.22 . In order to account for the change in variables, a sensitivity analysis was carried out. The conclusion of the sensitivity analysis was that the equity value is highly sensitive to changes in certain variables and that deviations from the expected values for these variables, would result in a significantly different equity value and corresponding stock prices. In total the result is that if all assumption throughout the report hold, both BMWs stock classes are undervalued. The preferred stock was undervalued with ca. 12 , whereas the common stock was undervalued with ca. 18 .
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Eisenach car production facilities. They started the development of their first small sized car. During the 2nd World War, BMW was heavily involved in the production of engines for airplanes and other war activities. After the 2nd World War the company BMW, how we know it today, started to evolve. The first step was made by the German industrial Herbert Quandt, who bought the stock majority of 60%. The capital injection made BMW able to develop their first middle class car and thereby enter the broad market. In the following years things developed quickly and automobiles were becoming the major part of BMWs operations. For the first time BMW entered the luxurious automobile segment in 1951, where they launched the BMW 501. In 1989, the BMW Group issued preferred stock for the first time (www.bmweducation.co.uk, 2010). In 1994, BMW realized that they could only succeed as a car producer if they could drag on the same economy of scale as their competitors. The acquisition of the Rover Group was therefore a natural step in the business development. Contrary to BMWs expectations, the acquisition of the Rover Group proved to be a big failure. The models were out fashioned and the expected sales figures were therefore never reached. During the years after 1994 the British Pound increased by 25%, which made it really costly to serve the loans, which were obtained in British Pounds. In 2000, BMW pulled the emergency brake and partly sold the Rover Group. Land Rover was sold to Ford and Rover was sold to a British investment group for the symbolic amount of 10 Pound Sterling (Guardian, 2009). The only business unit which was kept was Mini. The BMW Group extended their brand portfolio in 2003 through the acquisition of Rolls-Royce. Today BMW is a house of brands consisting of BMW, Mini and Rolls-Royce. Contrary to the beginning, the operations of the BMW Group are now no longer local, but globalised and the strategy is no longer focused at production, but on branding.
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The figure above shows a high volatility of BMWs stock prices over the last years. This volatility makes it difficult for investors to judge whether the stock is at a turning point or has reached a somehow stable level. The aim of this report is to come up with a market value assessment of the BMW Group through the evaluation of strategic- and financial factors. Moreover, it is the aim to explore the differences between preferred- and common stocks. Hence, the research question of this report becomes: What is the market value of BMWs equity and its two stock types? It is not the purpose of this report to calculate a market value, which is identical to the market price on the cut off date. Instead this report establishes a market value, which is based on a reasonable choice of factors and assumptions. In order to answer the research question the following supportive questions will be answered:
Historical financial analysis What has BMWs net operating profit less adjusted taxes (NOPLAT) and invested capital been over the last 5 years? What return on invested capital (ROIC) does BMW earn on its operating activities?
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What is the companys weighted average cost of capital (WACC)? Strategic analysis Which external threats does the company face, how serious are these and how should the company cope with them? How exploitable are BMWs external opportunities and how should they make the best use of them? Which strengths does BMW possess and how can they be used most effectively? How should BMW deal with its internal weaknesses? Valuation What is BMWs market value and stock price? How sensitive is BMWs market value and stock price to changes in variables? How can the price difference between common- and preferred stocks be explained?
1.4 Structure
The structure is outlined in order to help the reader to approach the report in the right way; moreover the reader will be told why the given structure was chosen. The authors have chosen to visualize the structure in Appendix 1, which can be found in the back of the report. The report is divided into four parts; Introduction, historical analysis, strategic analysis and valuation. The reader has already been introduced to the company in the brief introduction. This was done in order to familiarize the reader with the discussed company and provide the foundation for the rest of the report. After the brief introduction, the reader was exposed to the problem statement, which is structured with an overall research question and with several supporting sub questions. When having read about the structure, the next chapter is about assumptions and delimitations. The introduction ends with a part about the methods applied throughout this report and the reasoning behind the choice of methods. The historical analysis is performed in order to find the economic performance for BMW rather than the accounting performance, which is given by the company statements. The rearranging of financial statements, when performed correctly, makes the writer able to find invested capital, NOPLAT, Free Cash Flow, ROIC, reinvestment ratios and revenue growth. Finally, BMWs cost of
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capital is estimated. The cost of capital (WACC) will in the valuation part be used on a static WACC basis and hence be very important for the calculation of BMWs company value. The environment and the industry are covered through an external analysis, whereas an internal analysis is used for the evaluation of the companys resources. The strategic analysis will not only account for the past five years, but also make a forecast of the future. This forecasting is divided into two periods. One being from 2009-2014 (short run), the other ranging from 2015-2024 (medium/long run). The reason for dividing the analysis into three time periods is applicability to the later valuation, which is divided into similar time periods. Moreover, the analysis of the past five years gives a good idea about the strategic issues in the last years and hence help to forecast and perspective the real impact of certain issues. The writers hope to account more realistically for the impact of strategic issues on the company through the comparison of certain issues in the past. The strategic analysis is summed up in a critical SWOT analysis, where different factors are graded and combined. The grading portrays the importance of a factor for the company and helps to identify extremes or trends in strengths, weaknesses, opportunities and threats. The combination of different factors, which are interconnected, enables an assessment of BMWs need to change. BMWs need to change is divided into three categories: areas for the need of change in the long-run, opportunities exploitable right away and serious threats. Lastly, the actual valuation is performed. First forecast drivers are found and forecasted according to the historical- and strategic analysis. Afterwards the forecast drivers are used to estimate the company value both through the usage of a discounted cash flow (DCF) and an economic value added (EVA) model. In order to account for the impact of changes in key variables, a sensitivity analysis is undertaken. Finally, the difference between the two stock classes is evaluated from a theoretical perspective.
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program DataStream. These three sources are all assumed to be of high quality and hence no adjustments have been undertaken concerning the data. The cut-off date for gathering additional information was the 17th of March 2010, which was the date for BMW presentation of their 2009 annual report. The historical financial analysis does only cover the most recent five years. This is of course not the ideal case, because such short time estimates can lead to biased data, where trends and unusual data cannot be filtered out and analyzed. The reasons for only choosing the period from 2005-2009 are the major financial implications on the BMW Group incurred in 2004, where Rover was sold. Moreover, the reporting period before 2005 changes many accounting principles, which makes it hard to compare accounts and numbers between years. The uncertainty with regard to the content of certain accounts was estimated to be too high and hence the authors have chosen to go more in depth with other issues. According to BMWs annual report of 2009, BMW operates after a certain target Debt to company value (D/V) ratio. This implies that the capital structure of BMW will not change significantly in the future. For this reason a static WACC has been used throughout the valuation. The BMW Group is analyzed with the main focus on their automobile business, because this is their main revenue source with about 98%. The financial department almost totally is a product of the automobile activities, where financing is needed. The peer group has been analyzed under the same conditions, so the revenue and sales correspond to the automobile segment. An important assumption is BMWs strategy to keep a target D/V ratio. This intention is stated in all of their annual reports, but no exact D/V is mentioned. The target D/V ratio for the BMW Group is assumed to be at 60%, because this is close to their D/V ratio in the years before the financial crisis set in. In the forecasting it is assumed that the past five years give a good and truthful starting point for the estimation of the forecast drivers. The forecast drivers are assumed to depend on the period and years before the actual forecast and hence no abnormal values are found among the value driver forecasts. The stable state is assumingly reached in year 2025, where many markets worldwide are mature and growth declining. A prerequisite for calculating the continuing value of BMW operations is the assumption that BMW will live up to the going concern principle and continue their operations indefinitely. Page 11 of 93
A core assumption for this report is that the authors, based on the financial and strategic analysis, are able to estimate forecast drivers, which correspond to the future. A more general assumption is the efficiency of capital markets. This is an important assumption in crisis and post crisis times, where investors might be lead by necessities. A necessity might for example be an investors need for money, which can lead to a sale even though the investor is aware that the share is sold below its actual fair value.
1.6 Methods
Methods from many different areas are used in this report. In the historical analysis, definitions from finance are used in order to find the economic performance rather than the accounting performance of the company. In the calculation of the WACC, regression analysis is used to calculate a Beta value. In the strategic analysis a degree of turbulence analysis was used to assess the environments likelihood to change and the predictability of market outcomes. Afterwards, a PEST and a SWOT analysis are used to find out something more concrete about the environment. More methods from the area of strategic management, like those three just mentioned, are used in the internal analysis. Here McKinseys 7s model and the VRIO Framework are used to find and evaluate internal resources. The strategic analysis is finally summed up in a KFS and a SWOT analysis. After the prerequisites for the forecasting have been dealt with in the strategic analysis, the forecasting is carried out. The main driver in forecasting, which is revenue growth, is validated with the help of statistical analysis. Finally, the valuation methods DCF and ECA methods are used to calculate the equity value. The reasoning for the choice of certain methods in the different analysis parts, will be given along the application of the respective methods. Hopefully, this will create a better connection between methods, assumptions and the application if methods, than would otherwise be obtained. The literature used in this report is mainly taken from scientific books, newspaper articles, reliable internet sources, annual reports and databases. The option of including qualitative data in the form of interviews has been evaluated not to be necessary, because it would probably only slightly contribute to a more precise market value. On the basis of only a small contribution of qualitative research to the market value assessment of BMW, the writers chose not to include it.
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all numbers are given in mio. Invested capital (excl. Goodwill) Invested capital (incl. Goodwill)
2005
2006
2007
2008
2009
38.180
41.017
47.167
52.953
51.683
42.773
46.329
52.837
58.594
57.062
The figure above shows that BMW is increasing its investments until year 2009, where investments decline. The decline in investments in year 2009 reflects the decline in revenue and overall profitability. The area where most invested capital was saved from 2008 to 2009 was inventories. In this area BMW managed to bring down there inventory holding and hence free some invested capital.
2005
2006
2007
2008
2009
3.717
3.915
4.381
2.129
1.253
The NOPLAT calculation gives a good overview of the historical profitability of the company. BMW is at a current down, which is caused by the financial crisis. Consumers are demanding fewer cars than previously and this is having a big impact on the whole industry. The crisis is having an especially big impact on the car industry, because car purchases often can be postponed. The NOPLAT of BMW topped in 2007 with a record breaking result of 4,381 million. The high
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NOPLAT in 2007 was due to record high revenue and an increase in deferred tax liabilities (Annual report 2007). In conclusion the NOPLAT is very dependent on the external economic conditions. The fact that BMW made it through the very hard crisis years 2008 and 2009, must be seen as a positive thing when evaluating BMWs ability to grow its NOPLAT.
all numbers are given in mio. Gross Cash flow Gross investment Free Cash Flow
2006
2007
2008
2009
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A key figure in connection to the free cash flow is the reinvestment ratio, which indicates if the company is growing, how fast it is growing or if it is scaling down its operations.
Reinvestment ratios
2006 -80,42%
2007 -105,98%
2008 -132,46%
2009 38,31%
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According to the figure above, the company is facing a hard time covering their invested capital. Both ROIC including and excluding goodwill give the same picture; the company has a significantly declining ROIC since 2007. This can be explained through the sharp decrease in NOPLAT, whereas the invested capital has remained almost unchanged. BMW has been unable to respond to the decline in sales caused by the financial crisis. Their cost og goods sold (COGS) are almost identical throughout 2007 to 2009, whereas their sales have been declining by 3,000 mio. per year.
Royce, since these are only produced in Great Britain. The focus on bringing down transaction exposure through the establishment of world-wide production facilities has however exposed BMW to more translation and operating exposure. In order to assess the real revenue growth of the BMW Group it is necessary to look at changes in exchange rates and their interest in different currencies. Currency changes had the following impact on the BMW Group during the last five years:
Table 2-6 - exchange rate impact
2009 -51
2008 178
2007 -46
2006 82
2005 66
In 2007 and 2009 exchange rates had a negative impact on the BMW Group, where 2005-2006 and 2008 had positive effects for the Group.
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2.7.1 Financial Leverage Leverage is in the wake of the financial crisis probably a better measure for the companys credit health. Liquidity is a good measure during times of crisis, where it is important to have a flexible capital structure and be able to react immediately to market stimulus. However, in times of recovery and more stable market growth, which is predicted for the coming years, the long-term perspective of leverage might be a better measure. The leverage is estimated by comparing BMWs Debt to market value of equity over the analysis period. Further BMWs Debt to market value of its equity will be compared to its competitors.
Table 2-8 - BMW's Leverage
BMWs historical leverage has been suffering during the financial crisis, with an increased amount of debt to equity. This however was characteristic for the overall market at the moment and should not be seen as a sign of weakness.
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The peer group leverage average is distorted by the enormous debt to equity ratio of VW. BMWs is lying below the average leverage, which means that BMW with its current outlook has a good position to service its long term obligations.
Revenue R&D COGS Net profit cars sold R&D/revenue COGS/Revenue Net profit /Cars sold (Qty) Working Cash / Revenue Brands
BMW 50.681 2.448 -42.908 210 1.286.310 4,83% -84,66% 0,0001632577 15.33% BMW, Mini, Rolls Royce
Mercedes 78.924 4.181 -65.567 -2.644 1.093.905 5,30% -83,08% -0,0024170289 12.42% Daimler-Benz Mercedes, Smart, Maybach
VW 105.187 3.000 -91.608 911 6.309.743 2,85% -87,09% 0,0001443799 18.12% VW, Audi, Seat, Skoda, Lamborghini, Bentley, Bugatti
Ford 118.308 4.900 -100.016 2.717 x 4,14% -84,54% x 19.53% Ford, Lincoln, Mercury
(Source: Own calculation based on annual reports from the respective companies) The x in the figure indicates that a number could not be obtained from the annual report of the corresponding company.
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Where; D/V, Ec/V & Ep/V = the weights of debt, common and preferred equity, respectively, to enterprise market value. T = the companys marginal income tax rate kd, kec & kep = the cost of debt and equity respectively.
The following sections will be going through the steps of estimating the different measures needed to calculate the WACC. In each section results will be presented and decisions will be reasoned for. Finally the results are summed in a conclusion arriving at an appropriate WACC.
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with a target debt to value ratio (BMW AR, 2009). They do however not disclose the exact target debt to value ratio. 3.1.1 Market Value Weights To determine the market value of BMWs equity number of common shares is multiplied by their respective market price and the same has been done for the preferred stock class. This is part of the calculations in table 3-1. This table shows the portion that the entire equity represents of market value. The equity weight has been further decomposed in order to obtain the weighting that is used for the two different stock classes. Table 3-1 shows the weights disclosed in the BMW financial report as well as estimations based on the financial reports.
Table 3-1 - Market Value Weights
(Source: BMW financial reports 2005-2009 and own calculations based on the reports)
The two stock classes are assumed to maintain their relative share of total equity throughout the forecasting period. The weight of the two classes is based on the figures for the financial year ending 31.12.2009. The historical development in the percentage that the two classes make of the total equity can be seen from the below table.
3-2 - The composition of equity
Market value of Equity in Percentages Year Common Preferred 2004 94,10% 5,90% 2005 93,05% 6,95% 2006 92,02% 7,98% 2007 93,08% 6,92% 2008 94,73% 5,27% 2009 94,05% 5,95%
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The weight of BMWs debt is based on the book values, which is a breach of the assumption that the weights should be based on market values. This is however not considered to be of significant importance for the valuation as the book values of debt are considered as good approximation of their current market value. Based on these values the capital structure of BMW is constructed and presented in table 3-1. Based on these results a capital structure for BMW AG of 40% equity to enterprise value was assessed. This corresponds to the average of equity to company value before the financial crisis. This value is chosen as it is expected to be closest to BMWs target debt ratio. Multiplying the percentages found in table 1.2 for 2009 with the 40% equity weight and the weights for the two different stock classes are used in the market value calculation of equity. This leads to market value weights of 60% for debt, 2.38% for preferred equity and 37.62% for common equity. These values will be used when calculating the WACC at the end of this chapter. 3.1.2 Tax The tax rate chosen is 30%. This is close to the statutory corporate tax rate in Germany of 30.2%. The average effective tax rate for the company over the historical period is found to be 27.3% (own calculations). The tax rate is set just below the statutory tax rate as the company also pays taxes in other countries, where the tax rate is lower.
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The Fama-French three factor model is an attempt to remove this tendency by introducing further two portfolios when estimating a companys specific beta. The two additional factors are meant to capture the excess return of small stocks over large stocks and the excess return for high book to market stocks over small book to market stocks. This should increase the precision in the calculation of return on equity. Even though the Fama-French three factor model is backed up by empirical research it is still a young model and much has still to be researched on it. Even though it is used increasingly in practice, there is still much doubt about how many data points should be used when calculating the different portfolios (Koller et.al, 2005, p. 317). The APT is a very theoretical model. It is constructed in such a way that all factors, which are influencing a companys required return on equity, are accounted for and afterwards added to the risk free rate (Koller et.al, 2005, p.317). The main critique of the model is on the practicalities of it. It has not been determined what the factors that influence the return on equity are. Furthermore any deviations from the model will result in arbitrage. The CAPM is chosen, because it is the preferred model among practitioners and furthermore has withstood the test of time, which indicates that it is a strong model. It is noted that the CAPM might be too simple to capture all factors influencing the calculation of return on equity, however it is considered to be of minor importance for the valuation of BMW.
E(Rm) = the markets expected return rf = The risk free rate i = the stocks sensitivity to the market E(Ri) = security is expected return It should be noted that the procedure for calculating the required return for preferred and common equity is based on the CAPM. The only difference in the used inputs for the two classes is the beta, which will be specified later.
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3.3.1 Estimating the Risk Free Rate When estimating the risk free rate most practitioners turn to government treasury bills or bonds (Koller et. al., 2005, p. 296). There is a big difference between the practitioners and the scholars, when estimating the risk free rate. 43% of scholars use a treasury bill as an approximation for the risk free rate, while only 4% of the practitioners do (Robert F. Bruner et.al., 1998, p. 17). The current yield on the 90-day German treasury bill is 0.12% (www.bloomberg.com, 2010). This is extremely low and is caused by the financial crisis, which has forced the central banks to decrease the interest rates in order to boost economy. We choose to use a 10-year government bond as it matches the period of analysis better than a 90-day treasury bill. Several different government bonds were considered. There was doubt about whether an US government bond with a 10-year maturity or a German 10-year Government bond should be used. Since there is very little difference in the two bonds liquidity the German 10 Year government bond is chosen as BMWs headquarter is located in Munich, Germany. When calculating the risk free rate data was collected on the constant 10-year maturity German Government bond from 1.1.1995 until 1.1.2005. The data was collected quarterly. The development in the 10 year German government is presented in appendix 2. Three different time periods was considered for calculating the risk free rate as the current yield on the 10-year German Government bond is 3.06% (www.bloomberg.com, 2010), this is considered to be too low to be used for the entire forecasting period. The period 1995-2006 was considered as it is believed to be a period of stable market developments and it should give a good indication of the risk free rate in a normal stable market. The time period of 2005-2009 was considered as it was identical to the period of our historical analysis and thereby more closely connected with the historical returns of the company and its performance. Lastly a time period using all data points was considered as was expected to depict the development in the risk free rate in both unstable and stable market conditions. The first period, 1995-2006, was chosen as it is expected that the future markets will be stabilizing and return to a level seen prior to the financial crisis. This corresponds to a risk free rate of 4.97%, which will be used in our future calculations. 3.3.2 Estimating the BMWs sensitivity to the Market In the following the calculations of the two BMW betas will be presented. Several different simple regression analyses where conducted in order to get a better picture of the betas in connection with different market portfolios. The full regression analysis and calculation on DAX30 for the common Page 25 of 93
stock is presented in appendix 3. The procedure for calculating all the betas is outlined in that appendix. It should, however be noted that the calculation on the other indices where conducted in a similar way. Data was gathered on the development of the BMW common share as well as the development on the different stock indices. These figures were then regressed against each other in a simple regression model, which is introduced in the following. In the estimation of the companys sensitivity to the market or beta () the market model was used (Koller et. al., 2005, p. 306):
where; Ri = the % change in BMWs share price Rm = the % change in the DAX30 index
The model is: (Appendix 3) Ri = -0.0053 + 1.0038Rm + This means that the estimated beta of BMW on DAX30 Performance. The high-end car segment is probably significantly more affected by macro factors, such as fluctuations in the economy, than company specific factors, such as operating risks, which explains why the beta values are so close to 1.
Table 3-3 - Beta values
Index MSCI Own Calculation S&P500 Own Calculation DAX30 Performance Own Calculation Bloomberg.com DAX30 Frankfurt Boerse DAX30
(Source: Public Betas from Bloomberg and Frankfurt Boerse, 23-4-2010 and own calculations based on data from DATASTREAM)
The Beta calculated on the basis of DAX30 is chosen as a fair estimator, although it seems to be slightly less than those offered by professional services. The same steps were used for the preferred stock class and it yielded a beta equal to 1.07.
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3.3.3 Estimating the Risk Premium on Stocks The risk premium on stocks, defined as the difference between the return on the market portfolio and the risk free rate, is one of the most debated topics in finance (Koller et. al. 2005, p. 297). The risk premium is the same for all equities. It captures the shocks that all companies are exposed to by being in the market. These shocks normally come from the macro economic factors. Koller et. al. mentions 3 broad categories of estimating risk premium on stocks (Koller et.al, 2005, p. 298). These are: 1. Estimating by measuring historical market excess return Extrapolating the development in government bond vs. stocks 2. Using current market variables to estimate the current market premium Aggregate dividend-to-price ratio which projects the expected market premium 3. Reverse engineer the market premium by means of DCF valuation, based on estimates of Return On Investments and growth The problem associated with using a historical market premium is its dependence on the past. Hence, there is no guarantee that the risk premium of the past will be identical to the risk premium of the future. When using market variables the advantage is that they are grounded in the present and reflect future expectations. It is possible to predict future market premiums by means of regression analysis on dividend yields (Koller et.al., 2005, p. 304). However they have an undesirable possibility of being negative. It is chosen to use an outside source for the risk premium, because estimations are not expected to be more precise. Furthermore no one has yet been able to establish any long-term trend in the market premiums (Koller. et.al., 2005, p. 303), suggesting that the regression of market premiums might not be any more precise than average historical market premiums. Koller suggests a market premium between 4.5% and 5.5% whereas the majority of practitioners use a market premium between 4% and 6% (Bruner et.al., 1998, p. 18), which is very much in line with the estimated values by Koller. These values are based on markets, which are in a stable development and not characterized by great uncertainty. Due to the financial crisis, a 6% risk premium seems reasonable and will therefore be used in the calculations.
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3.3.4 Conclusion of the CAPM The risk premium, which are given in table 3-4 are evaluated to be the most appropriate values for the return on equity, which could be obtained. The values are therefore used in finding the WACC.
Table 3-4 - Calculating Cost of Equity
CAPM: Rf i Rm E(Ri) Preferred 4.97% 1.07 8 11.40% Common 4.97% 1.0038 8 13.00%
(source: own calculations)
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Another method that could be used is the yield spread over US treasuries. These spreads are calculated by Bloomberg and presented in Koller et. al. on page 320. It has not been possible to obtain spreads, which were more up to date than in the book. The procedure is quite simple though. In order to estimate the companys cost of debt one takes the risk free rate and adds the spread corresponding to the companys credit rating. The spread used is the one corresponding to the current credit rating of BMW. This is not corrected though there is a change of further downgrading of the company. With a maturity of 10 years and a credit rating A2/A, the spread is 48 basis points. When this is combined with risk free rate the cost of debt becomes: 4.97% + 48 basis points = 5.45%.
Table 3-5 Cost of Debt Rates Compare to Risk Free Rate
Source BMW Koller et. al/Bloomberg Corporate Bond Risk Free rate
(Source: Own calculations based on data from Datastream, BMW, Koller et.al & Bloomberg )
Table 3-5 gives an overview of the different interest rates that were considered as estimators for the cost of debt. The corporate bond is a corporate bond index calculated by JP Morgan for companies rated A, as BMW is currently. It was included to indicate that the current cost of debt according to the financial statement of 2009 for BMW is not much higher than for other similar companies. The chosen cost of debt, to be used in the calculation of BMWs WACC, is the interest rate from Koller et. al./Bloomberg. This is chosen as it is considered to fit expectations best possibly in the years to come. This means that the cost of debt becomes 5.45%.
3.5 Conclusion
The WACC can be calculated and it will be presented in the following table.
Table 3-6 - Calculating the WACC
WACC
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As can be seen from the table 3-6, the WACC is calculated to be 6.69476%. This WACC is evaluated to represent BMWs current cost of capital most precisely and hence it will be used in the valuation to discount back cash flows and economic profit.
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is able to act accordingly. The industry participants all know that the trend is going towards environmental friendly cars, which implies that it is forecastable to say where the market is going. According to the DOT analysis, the environment obtains a score of 3. Consequently, the environment is changing and there is a need for continuous adjustments to the preliminary strategy by the BMW Group. Accordingly, the following strategic analysis will focus on the prescriptive approach, but also emphasize that there might be some changes in factors.
4.2 PEST
A PEST analysis stands for: Political-, economic-, socio-cultural- and technological factors. These areas are listed, analyzed and related to the BMW Group. The purpose of this is to get an impression of how the environment is going to change in the future (Lynch 2009). However, it must be kept in mind that a PEST analysis first and foremost builds on historical data. As previously mentioned in the degree of turbulence analysis, the environment gets a rating of 3, which means it is likely to change. Hence, it becomes more difficult to predict the future from past events. Further it must be acknowledged that the results from the PEST analysis are not directly transferable to the future. For this reason, the factors in the PEST analysis will be divided into three time periods. The first being an analysis of past events (the last 5 years), corresponding to the historical financial analysis. The last two time periods deal with the future. In order to predict the future accurately, the analysis is divided into the short run and the long run. Lastly, the factors will be quantified on a scale from 1 to 5 (1 being the most favorable for BMW). This should simplify the comparison between factors and further make past and future events comparable (Appendix 5). When applying too many factors, a PEST analysis can easily become confusing and irrelevant. The purpose of the following analysis is therefore to focus on the most relevant factors and describe them in detail. 4.2.1 Political factors In the past one political factor has lead to several obstacles for BMW. This namely is the enforcement of new laws. The areas, which at the moment are debated the most, are the emission of CO2 and the end-of-life vehicles directive (www.environment-agency.gov.uk, 2010). Tighter emission standards are on the agenda all over the globe, especially in OECD countries. It is not just a matter of national legislation; also some city areas are restricting CO2 emission (www.umwelt-plakette.de, 2010). Europe, which accounts for 50% of BMWs total revenue, has
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had similar standards for several years. The current standard, the EURO 5, was enforced on the 1st of September 2009. It prescribes the car manufacturers to follow certain norms and further makes the manufacturers liable for the performance of the car for 5 years or the first 100.000 km (www.ec.europa.eu, 2010) Also BMWs second largest market, the US, is enforcing emission regulations in certain areas. The emission restrictions can easily increase costs in the areas of development, testing and manufacturing for BMW. Another hot issue, where the EU is the forerunner, are ELV directives, which dictate how the endof-life vehicles (ELV) should be recycled. Further the directives state that the car manufacturer is obliged to take back components as: airbags, shredder residue and fluorocarbon. The directive poses additional costs on BMW, since they will have to take the recyclability of the car components into account and the cost of scraping the components they receive after ended life of the car (EU directive). BMW has reacted on this directive and is now manufacturing cars, which are at least 85% recyclable and at least up to 95% recoverable (Group Management report 2008, p. 32). Even though BMW has been able to cope with the new directives in the past, newer and more stringent directives remain a threat to the company in the future. BMW should however come easier about the more stringent directives than competitors, since they continually try to beat the industry in terms of sustainability (www.sustainabilityindex.com , 2010). The last, but not less important political factor, is the political (in)stability in emerging markets. This area is of great importance to BMW, since these markets take up a larger part of total revenue (Group Management Report, p. 15). Moreover, these markets represent the future growth prospects for BMW. Emerging markets currently deliver about 13% of total revenue. (Own calculations of p. 15 Annual report) Political instability can lead to very different outcomes, but common for them is the negative impact on BMWs bottom line. In the future the operations of BMW in emerging markets will increase, hence a increase in the dependency on political stability will occur. 4.2.2 Economic factors The world GDP growth has been fluctuating a lot in the past years. In 2008 the market contracted with a decline in GDP of 2.6%. In 2009 however, world GDP grew by 1.6%. The projections for 2010 is a growth in GDP of 2.5% (IMF, 2009).This leads to the suggestion that the world economy is about to recover from the financial crisis. Projections for the years from 2011-2025 predict world GDP to increase steadily by 3.5%. For BMWs operations it seems relevant to distinguish between the growth in emerging markets like China and India and the growth in Western economies
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like Europe and the US. The prospects for China and India are a GDP growth of 4.7% and 6.2% respectively, whereas the US and Europe grow by 2.2% and 1.8% respectively (Duval 2010). In the wake of the financial crisis there is a huge awareness for the credit risk associated with especially debt financing. BMW therefore finances its activities by matching the maturities of bonds to their activities. They further rely on derivatives to hedge for the interest rate risk (BMW AR, 2008). Even though interest rates are historically low at the moment they are expected to rise in the future (www.bluechip.com, 2009). BMW has two ways of reducing its currency risk exposure. One way is by natural hedging; BMW has production facilities in its major markets. Having production facilities located in the countries where revenue is generated means that BMW is able to spend the revenue in the same currency, hence reducing their currency risk. However these production facilities are specialized, so not every car model is produced everywhere. This means that BMW will not be able to perfectly match its revenue with its costs. At the moment BMW is exposed to the biggest currency risk from US dollar, British Pound, Japanese Yen and Chinese Renminbi. They in total account for 65% of BMWs total currency exposure. When BMW settles a deal in a foreign currency, they immediately conclude a exchange rate hedge to eliminate the risk (BMW AR, 2008). The main hedging takes place between Euro and US Dollar, since BMW has a large revenue from its US operations, but not correspondingly high costs. The current weak Euro makes the exchange rates to a major concern for BMW. Due to BMWs continuous globalization , currency risk exposure will remain an important topic for the BMW Group in the future. BMWs cost of manufacturing are to a very big extent determined through the cost of raw materials, which are used for the production of cars and motorcycles. The most used raw materials are by far steel and aluminum. These fluctuate a lot in price, which means that BMW has difficulties in predicting the future prices and therefore has the risk of under pricing their products and earning less than desired on their products or maybe even incurring losses (BMW AR, 2008). The prices on aluminum and steel have risen over the last years (www.metalprices.com , 2010) and for April 2010 experts expect the price of steel to increase by further 10-15% (www.economictimes.com, 2010).In order to counteract the volatility in raw material prices, BMW hedges. They have further centralized their purchases of raw materials, so they now can rely on the synergies created by mutual acquisitions (BMW AR, 2008). Due to the limited access to raw
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materials and the increasing demand by emerging economies, the price of raw materials is expected to rise in the future. The price of crude oil is another major determinant for the economic outlook of the BMW Group. The price of crude oil is both reflected in the price of manufacturing and in the demand for products. An increase in the price of crude oil will therefore have a double negative effect. Just as with the price of raw materials, the price of crude oil must be expected to rise in the future, due to the increased demand from emerging markets. 4.2.3 Socio-cultural factors The demographics of the emerging markets are yielding new opportunities to BMW. The middleclass in countries like India and China is growing continuously and hence new big target segments evolve (www.euromonitor.com, 2010). In BMWs existing markets, concern for the environment plays a more and more important role. Especially consumers in the US and Europe demand green products, which live up to emission standards and environmental directives. BMWs reaction to their customers change in preferences, becomes evident, in BMWs increased focus on hybrid cars, dual fuel engines and in general more fuel efficient cars. BMW has also produced 500 hydrogen cars, which have been handed over to the customer on a trial basis (BMW AR, 2008). At the Climate Conference in Copenhagen BMW sponsored several vehicles with low CO2 emission (www.pressebox.com, 2010). Through its focus on green driving, the BMW Group achieved to be the market leader on the Dow Jones sustainability index (www.sustainabilityindex.com, 2010). In the long run BMW is expected to remain at the forefront of sustainability by providing innovative solutions to environmental issues. 4.2.4 Technological factors A recent survey of top managers in the automobile industry revealed what they considered the top issues for the future. 85% of respondents answered that technology is the top priority (Automotivenews, 2010). This leads to the conclusion that technology is an area where it is difficult to gain a competitive advantage. Even though competition is fierce, BMW managed to get an advantage in the production of engines, which lead them to win several engine of the year awards (BMW AR, 2009). The increased focus on environmental issues is creating possibilities for the development of environmental friendly solutions within the area of transportation. As already mentioned BMW has a good position, because BMW has researched in this area for years, by
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researching dual fuel engines, hybrid electric cars and hydrogen driven cars. When talking about technology and R&D it is not just important to be innovative and have the best technology, it is just as essential to be perceived by customers as the most innovative. This point was emphasized by Thomas Weber (Daimlers head of development), when he acknowledged that Daimler is beginning to catch up on BMW in terms of technology, but is still lacking behind in terms of public perception (www.chinadaily.cn, 2010). In the short run BMW will as a response to the current situation cut costs in research and development, but in the long run they are expected to expand their activities within R&D and keep their focus on technology (www.bmwgroup.com, 2010). 4.2.5 Conclusion of the PEST analysis The PEST analysis suggest that there is a continuous improvement for BMW in terms of external impact on the organization. The relevancy of each factor for the future was considered equal across the four external factors. This might however be doubtful, since the economic factors will have the most direct effect on BMWs performance. The enforcement of new laws and the political instability in emerging markets are the main political factors. Several economic factors are identified, because they are assessed to have the most direct effect on BMW profitability. The biggest threats are interest rate risk, currency risk and increasing raw material prices. Contrary, the predicted increase in GDP is an opportunity, which could help BMW to increase its revenue. The most important socio-cultural factors for BMW are the growing middle class in emerging economies and the increasing demand for green products. Within technologies, innovation in the area of sustainable solutions, is evaluated to be the most important issue for BMW. There are of course other factors, which have not been specified in the PEST analysis. These have been left out in order to focus on the most relevant factors impacting the development of the company. Consequently, the PEST analysis should only be seen as a guideline for the future development; not an concise description of all factors. According to table 4-1, BMW is facing an overall importance of general environmental factor in the future. The composition does however change. In the future socio-cultural factors are more positive for BMW, whereas economic factors have a negative impact on the company. The positive outlook in terms of socio-cultural factors can be explained to the expected increased demand for green products in the future. The negative economic outlook is associated with the increase in raw material prices.
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PEST overview Political factors Economic factors Socio-cultural factors Technological factors Grand average
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that uses the following catchphrase: The Ultimate Driving Machine (www.bmwgroup.com, 2010). The branding and brand awareness is something the car manufacturers are investing heavily in. Examples of BMWs engagement in sponsorships are: Sport events and events with the focus on sustainability. BMWs does obviously make sure that the events they sponsor are in line with the image, which BMW has. BMW e.g. sponsors golf tournaments (Golf Today, 2010), Americas Cup sailing (www.bmworacleracing.com, 2010) and Olympia 2012 in London (www.auto-motor-undsport.de, 2010). Leasing Financing In recent years, there has been a significant increase in the financing activities of BMW and their competitors. All larger car manufacturers in the world have financing as a separate business unit, performing leasing services, financing and even banking to their customers (Datamonitor, 2009a,b,c,). This suggests that the companies are trying to boost their sales by offering their customers ways of financing their purchase. This has opened up all new market opportunities for branding, marketing and it has increased competition. This is substantiated by the increase in demand for leased products (www.automotivenews.com, 2010a). Static Industry There has been very little change in the world top 10 largest manufacturers of cars in the period 2003-2008, the two recent years, however, have seen 1 new company in top 10 each year (OICA, 2010). This fact, in combination with several mergers starting in the late 1990s (Automotive news, 2003), suggests that this is a well-consolidated market. It seems to be obvious that competition is working fine and companies are investing in large production facilities in order to achieve economies of scale. The ten biggest companies have been successful in this endeavor, since there are no other indicators pointing in the direction of less competition. The concentration ratio among the top four producers is at 41.62% (OICA, 2010) with an even distribution among the four, which does not indicate any problems with the competition. Financial Crisis and M&A The financial crisis, which hit the world with all its fury in the second half of 2008, has brought several of the major car manufacturers to their knees. This seems to be especially true for the American manufacturers: GM, Chrysler and Ford, which received state funded financial support in order to stay in business (Ingeniren, 2008). This could mean that the future would hold even more
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mergers and acquisitions, because some companies might find cheap struggling companies that could fit into their portfolio. The industry rivalry is considered to be very fierce in the premium automobile segment. This is seen on the basis of the high marketing and branding efforts that the companies engage in. Furthermore the rivalry is expected to increase even further in the future. This is based on the possibility of new entrants to the market. 4.3.2 Entry Barriers The premium car manufacturing industry is characterized by heavy marketing expenditures allowing the companies to charge a premium for their products. The products in this segment are considered to be more luxurious and of better quality than the competitors in the more ordinary classes, such as Toyota, Ford, Nissan, Suzuki and Mazda. Heavy marketing expenditures, as well as inputs of higher quality, ensure the companies in the premium car segment, their mark-up. Customers are willing to pay a price premium for the image of premium brands. They want to make a statement with their purchase of a premium car and it is this statement that the heavy marketing expenditures ensure. Potential entrants to this segment will have to spend a lot of money on branding their products in such a way that the consumers see their products as being of equal quality and technological standard. R&D Investments Investing in marketing is not everything. In order to secure a foothold in the premium segment the intruding company must also focus on continued development of the cars. Design, production and quality-management are just a few areas. BMW has an advantage in terms of R&D investments, because they have a base to build on and do not have to start from scratch, like new entrants to the market, would usually have to. Emerging Countries There is a growing export potential in the developing economies, with China in the lead. This export potential can lead to a significant threat to BMW if a Chinese competitor enters into the premium segment market, with a product as good as BMWs. These emerging countries are characterized by low cost production and they are constantly increasing their scale (Peridy & Abedini, 2008, p. 1). In 2006, China was the third largest car manufacturing country; in 2008 they came in second just after Japan (OICA, 2010). This can be a threat to BMW, because BMW does not have the same home market to gain an equal economies of scale as Chinese producers. Page 39 of 93
Distribution Network Today, BMW has a large extensive network of distributors. BMW is present in more than 150 countries worldwide and distributes its products either through company owned showrooms, independent dealers, subsidiaries or importers (Datamonitor, 2009b, p. 5). This is a very extensive and large network but it is needed in order to secure BMWs quality requirements. A potential entrant must acquire or build a distribution network. This can be a very expensive and difficult investment but necessary if the company wants to control the vital service level, which is the basis for creating a loyal customer base. 4.3.3 Bargaining power of buyers When thinking about the potential buyers in a Porters 5 forces model, backward integration and switching costs come to mind. Backward integration meaning the possibility that costumers of the car industry are starting to produce their own cars is considered very small. The Switching costs of the general car industry is however very low. It means that it is very easy for the costumers to switch to another car brand if they are not happy with their current one. This gives customers bargaining power over the car manufacturers. For the premium automobile market the situation is a bit different. Customers in this segment have a reason for spending more than necessary for a car. Customer do often have high expectations when they buy a premium cars. This increases the need for the companies of the premium segment to deliver a service and a product, which is a bit out of the ordinary. If the customers are not happy they will either not come back the next time they are purchasing a new car or they will cause the company a lot of trouble. Both scenarios are costly for premium producer and both scenarios damage the companys image. These factors clearly give the buyers bargaining power over the company. This fact has also increased the awareness in BMW of maintaining a good relationship with the buyers and the company has developed a customer relationship management program (CRM) (www.allbusiness.com, 2010). The implementation of CRM and BMW distinctive brand contributes to customers being more loyal and it therefore decreases the bargaining power of the buyer. Leasing and Costumer Relationships Leasing of new cars has become a more and more important part of financing new cars. For BMW this is also true. Leasing agreements generated roughly 10% of their revenues in 2008 (BMW AR, 2008). Leasing can help the company to maintain a good relationship with buyers, since they are receiving payments from them each month and hence stay in continuous contact. Furthermore the
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customers have to return the car at the end of the leasing agreement, which creates an ideal opportunity to inquire the customer about the car and gives the possibility of setting up a new agreement. This suggests that the bargaining power of buyers is of less importance. All in all, customers bargaining power is assessed to be of minor importance for BMW. 4.3.4 Substitute Products The threat from substitute products comes from the fact that they are able to perform the basic task of the car e.g. transportation from point A to B. This could include alternatives such as trains, busses, bicycles or even walking. However in the case of BMW substituting products as the above mentioned might not be relevant to examine, since a BMW is meant to be much more than just a mean of transportation (www.bmwgroup.com, 2010). A buyer, who considers whether to buy a car or simply just commute by means of public transport would not buy a BMW, since such a buyer might be looking for the cheapest alternative and that is not BMW. The threat of such substitute products is therefore considered to be very low. Other car manufacturers Instead of looking at the alternative means of transport for substituting products it might be more relevant to actually look at other car manufacturers as substitute products. The substitute product could come from a car manufacturer who is not currently present in the premium segment. This could be car manufacturer such as Kia, Suzuki and Hyundai. These are car manufacturers who are operating the segment of low prices. They are competing on the best prices and their margins are considerably lower than BMWs (Automotivenews, 2008). This could increase the threat from these substitutes as they might venture into the premium segment trying to increase their profit margins. However this comes at a cost, since they must invest heavily in creating an image of quality, which the competitors in the premium segment already have. New Technologies The car manufacturing industry is continually moving towards more and more sustainable products. Several companies are researching hybrid cars and the first prototypes of hydrogen powered cars have already been produced. BMW has delivered 100 7-series cars for VIPs around the world, in order to promote the new hydrogen car (BMW AR, 2008). GM is expecting to launch mass produced hydrogen models by the middle of this decade (www.beyondfosilfuels.com, 2010). The
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future threat of these different types of fuel cell cars is considered to be manageable, since BMW is already investing in this field. All in all the threat of substituting products is considered to be small in the short-run and medium in the long-run, since new technologies influence the car industry. 4.3.5 Bargaining power of suppliers Market Prices BMW operates an extensive production facility network all over the world, with car production, as well as spare parts production, at several different locations worldwide (www.bmwgroup.com, 2010). The major suppliers of BMW are producers of components such as aluminum, steel, plastics and cables. The market for these products is characterized by many suppliers and many buyers, making the market operate under near perfect competition. This has a significant influence on BMW, since they have plenty of suppliers to choose from. In general BMWs with regard to suppliers bargaining power is expected to be positive. Hence, BMW has a good position when negotiating prices. Production Network The extensive production network that BMW possesses does have some important advantages. It gives the company the possibility of making the most of transfer pricing, moving expenditures to countries where it is beneficial. Furthermore BMW has won several awards for their production network and their relations to suppliers (Automotivenews, 2008). By increasing the collaboration between BMW and their suppliers they are able to achieve more beneficial prices, a better product development and co-operation in research and development (BMW AR, 2009). However the increased cooperation between BMW and its suppliers comes at a price. It can be very difficult for BMW to maintain full control as more and more is outsourced. This is always something that a company must consider before entering a co-operation. Dependency between suppliers and producers A close cooperation between suppliers and manufacturers in the automotive industry is common (BMW AR, 2008). When the financial crisis was on its top, BMWs suppliers were struggling with financing their operations. This problem was solved by BMW, who helped providing the needed funds. Consequently, the BMW Group was able to handle the situation without significant disturbances to production. This has shown the large risk that is involved when choosing suppliers. BMW does therefore not enter into a supply relation without thoroughly investigating the other
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party. Furthermore there has been a consolidation in the supplier market due to the financial distress of the financial crisis (BMW AR 2009). This coupled with the greater dependence between BMW and its suppliers have increased the bargaining power of the suppliers. 4.3.6 Conclusion on the 5 forces Analysis As can be seen from table 4-2 below, the car industry is assessed to become even more competitive in the future. This puts pressure on BMW to continually improve in order to stay ahead of the competition. The overall influence of factors in the premium car segment predicts a continuously worsening situation for BMW. The most significant factors in this connection is risk of new entrants to the market. Especially, car producers from emerging markets, which could drag on economies of scale from a huge home market, were considered a big threat in the future. In general BMWs position in the premium market it not assessed to be under threat. The strong brand and BMWs experience in R&D will help BMW to remain competitive in the future. BMW should however expect to lose market share, if new brand make their entrance to the market.
Table 4-2 - Porter's 5 forces summary
Past Industry Rivalry Potential entrants Buyers Substitute Products Suppliers Gand total 3.8 1 2 2 4 2.16
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VRIO framework, which indicates the factors which are most likely to be competitive resources for the BMW Group (Appendix 7).
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The possession of three premium brands creates a disadvantage in terms production compared to premium brand, which also have a volume brand associated. The BMW Group is not able to obtain the same economies of scale as its competitors, which can cover fixed costs like R&D costs more easily. A good example is Bentley, which underlies the mother company VW. Fixed costs of VW are spread out on the production of 6,309,743 cars and BMW can only spread its fixed costs on 1,286,310 cars in 2009 (Table 2-10). One of the cornerstones of BMWs success is its ability to create the new and unexpected. They have acquired their skills in research and development over several years, now making them able to drag on valuable knowledge for future developments. Consequently, the expenditure on R&D has increased over the period from 2003-2008 by 33% (BMW AR, 2003 & 2008). Valuable is also BMWs acquired knowledge about customers and their preferences, which makes BMW able to anticipate and respond to the market. Other intangible resources, which have been previously mentioned, are the highly skilled employees working in the R&D departments. They have been able to establish a close connection between the BMW brand, design and technological inventions. Lastly, it is worth mentioning that BMW has quite a few important strategic alliances. They have a strategic alliance with the Italian car manufacturer Fiat. Their agreement is about the mutual exchange and usage of parts within the brands of Mini and Alfa Romeo. The common development, manufacturing and usage of components makes both manufacturers able to gain economies of scale and thereby decrease their costs. The alliance is important in these times, where the global automobile industry is continuously consolidating and only very few independent brands exist. The alliance does however not only create a valuable resource for BMW it does also create a threat, since Fiat is producing the car model Alfa MiTo, which is a direct rival to the Mini (www.pistonheads.com, 2010).
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brake and selling Rover and Land Rover. The possession of Rover was about to ruin BMW as a business, because sales figured did not materialize as they were anticipated. The selling off of Rover was an immediate loss, because BMW only sold Rover for 10 Pound Sterling, but in the long run BMW has been able to increase their profit and turn Mini into profitability. BMWs leadership of the Dow Jones sustainability index is another good indicator for its future oriented way of doing business. Not only is BMW a leader in the category for automobiles and parts, they are also the overall leader of the sustainability index. Sustainability is becoming a more and more important factor in doing business, which can be seen at several places. The big attention, which was devoted to the climate conference in Copenhagen, reflects the time spirit, where people are more aware of their environment than ever before. This change in consumer preferences leads to a change in demand for automobiles, which perfectly fits the automobiles BMW supplies. A disadvantage of BMW equity structure might however be that some investors can find the overwhelming number of shares controlled by the Quandt family threatening, because the Quandt family can almost solely control the company and other investors have difficulties in influencing on the company. In conclusion, BMWs organizational capabilities must be seen as a real advantage compared to competitors.
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year 2012. The ROCE for 2009 is 3.3% (BMW AR, 2009), being at its highest in 2006, with a ROCE of 16.7%. BMWs main competitor Daimler incurred a negative ROCE of 4.8% in 2009 coming down from a positive ROCE of 8.7% in 2008 (own calculations based on Daimlers 2009 annual report). The BMW Group wants to bring down material costs with 3% annually. This would mean a cost reduction of about 750 mio . Another cost reduction of about 500 mio. is targeted in the area of human resources, where workers will be laid off. Additional cost reductions will be achieved through the use of standard components, benefitting from the economies of scale. R&D will still be a key area of the BMW Group, however the expenditure in this area will be brought slightly down. The strategy set out to reduce R&D expenditure in relation to revenue from 6.1% in 2006 to 5-5.5% in 2012. This goal is achieved and the R&D expenditure in relation to sales is at 4.8% (own calculations). In conclusion, the BMW Group is trying to bring down costs in many areas in order to achieve a higher return rate on invested capital. 5.4.2 Structure BMW has a typical corporate structure and is comparable to its competitors in many ways. They have several boards and of those the most important is the management and the advisory board. The management board takes care of the daily operations and the strategic development of the organization. It consists of 10 persons, with each their area of responsibility. The advisory board is there to support the decision making in the management board. The advisory board consists of 20 persons, whereof 10 are employee representatives and 10 are shareholder representatives. It shows that corporate governance is a major issue for the BMW Group (BMW AR, 2009). Even though the head quarter in Munich is the center of power, the subsidiaries, placed all over the world, are taking care of e.g. purchasing and marketing. Disadvantages of decentralizing the power with regards to acquisition and marketing are that the organization may not be streamlined and a diffuse picture of values can be the result. BMW tries to prevent the decentralization from escalating by hosting several obligatory courses for managers in brand awareness and core principles. Another disadvantage is the forgone economies of scale effect, which could be achieved by centralizing operations, using a divisional structure. The advantages by having a regional structure are e.g. the close contact to the market and a decreased currency risk exposure.
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Due to BMWs focus on streamlining the organization their company structure must be regarded as an advantage compared to companies, which solely operate their business from the headquarters. 5.4.3 Systems The systems of an organization can be divided into three: technical-, social- and administrative system (Lgaard, 2003). The division makes it easier to grasp all aspects and infer how the systems are interconnected. The technical system deals with production processes and production facilities. BMW, as a premium brand manufacturer, has high demands to the quality standards in the production process. Consequently, BMW demands its suppliers to live up to the high ISO/TS 16949:2002 standard (www.iso.org, 2010). ISO standards are quality requirements, which make sure that a production facility, which lives up to a ISO standard also lives up to a high quality standard. This enables the company to produce with a very small amount of defects. The results are satisfied customers and few costly call-backs of cars. In recent years there has not been any major damage caused to the organization from bankruptcy by suppliers, neither has there been damage caused by suppliers not able to fulfill their contracts. During the last few years, BMW has undergone a natural restructuring process caused by the increase in production efficiency. The restructuring means that jobs are cut in the area of production and partly transferred to other areas of the organization. The aim is to follow strategy number 1, which was presented above, in order to bring down costs with regards to employees. The social system composes the attitudes and norms established between employees, departments and geographical distinct subsidiaries. An analysis in this area should normally be founded on qualitative interviews conducted at all corporate levels. Since this was not possible and not the intention in this report, the social system will not be discussed any further. The administrative system ensures that the technical- and social systems are working fine and living up to the targets set by the organization. The decision making within the BMW Group is hardly accessible for an outstanding person, so this area cannot be analyzed further. The role of the payment scheme however is accessible, since it is specified in the Annual Reports. The regular employee has a base salary and an option to buy 35 preferred shares at a discount rate. Contrary, the management receives a base salary and a bonus, which is based on the yearly dividend payment. The bonus payment going hand in hand with the dividend payment is posing some risk for the company and its investors. Especially in year 2009 a doubtful situation arose, when the Page 48 of 93
management decided to payout the same amount of dividend/share as in the previous year, even though net profit had declined by more than 37%. The problem is that management might be tempted to keep dividends at a high level even though the companys performance does not allow this. The result is a management, which compromises the long-term prosperity of the company. The bonus scheme must be regarded as a weakness and it does not correspond to the understanding presented in the German Corporate Governance codexs (German Corp. Gov. Codex, 2009). According to the corporate governance principles, the investor should be protected managers working for their own sake instead of for the company. 5.4.4 Shared values, skills, style and staff The shared values, which should be part of every employees consciousness within the BMW Group are: High quality standards, customer focus, continuous improvements and sustainability (www.bmweducation.co.uk, 2010). The skills of employees were under the intangible resources identified as valuable. The condition of staff and style is assumingly good, with competent, motivated and committed employees coaching and motivating newly arrived employees. This assumption builds on the outline given by the BMW Group, stating in their strategy number one that the employees are their most valuable asset and therefore a major priority against
(www.bmweducation.co.uk, 2010). Moreover, the employees, which are working at BMW are highly skilled and some of the best in their respective areas. The high motivation and satisfaction of employees is ensured through continuous employee satisfaction surveys. Consequently, the BMW Group ranks as a favorite choice for students graduating from universities throughout Germany (BMW AR, 2009).
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BMWs access to and good reputation among highly educated persons is evaluated to be a temporary competitive advantage. It is both valuable and rare to rank at the top, when university students are asked about their preference for future employment (BMW AR, 2009). If BMW is able to retain this resource they will have an advantage to some of their competitors. Further does BMWs partnership with Fiat create a temporary competitive advantage. The partnership is valuable, because BMW can obtain some of the benefits from being a volume producer. It is rare because Fiat will not engage in several partnerships, because these are often bound by contract and the idea behind a partnership would shrink if too many companies were involved. The partnership could even be classified as a sustainable competitive advantage, because the partnership one could argue, is so difficult to imitate. Only few car producers are so specialized in the production of small cars as Fiat is. Finding an adequate partner with as much market knowledge and where the same economies of scale are created would be almost impossible. It would hence be costly for a competitor to create a similar partnership where the benefits would be comparable. Sustainable competitive advantages are found in the areas of: Branding, innovative capabilities and the focus on sustainable solutions. BMW with its possession of three premium brands is of course in an unique position with respect to its image. This position can hardly be imitated, it is at least not possible for competitors to totally imitate the brand. Competitors may however want to approach it, if BMWs brand remains as profitable as it has been until now. To create brands with the same wide spread premium reputation would however be extremely costly for competitors, so BMWs brands are definitely core resources. BMWs good reputation is created through several things, but one thing, which is prominently mentioned is their ability to be innovative. An indicator for their innovative capability, which was previously mentioned was their winning of the engine of the year award for several years. Possessing a workforce and a work environment, which creates so many innovative solutions is not only valuable, it is also rare and costly for competitors to imitate. Lastly, BMWs focus on sustainable solutions must be highlighted. This point can be seen as an extension to both their brand and their innovative capabilities, because the sustainable solutions are created through the excellent innovative capabilities in order to shape the brand for the future.
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In conclusion; if they build further on branding, innovative capabilities and focus on innovative solutions they will be well equipped to meet competition and retain or increase their market share in the future.
are in direct competition to BMWs premium brands. The volume producers can drag on the resources from the volume production to safe in all business areas. An example of a volume producer using this strategy is Ford, by having the brand Lexus and letting it share resources with its volume brand Ford. Volume producers or those, which according to Porter are pursuing a cost leadership strategy, will have larger economies of scale and hence have an advantage, when talking about costs. The BMW group however is standing out, as mentioned before, by using a differentiation strategy and since they have no volume car brands under their roof, they do not risk that their luxurious brands are compromised in terms of their image. Despite the volume producers advantage in terms of costs, BMW has been able to cut cost substantially in different areas. In conclusion, the BMW Groups most important factor of success is assessed to be branding. They further have to excel in the areas of cost, innovation and liquidity to stay competitive.
7 SWOT analysis
The SWOT analysis is a sum up of the external and internal analysis. Moreover, the SWOT analysis will be used to manipulate the strategic findings in order to identify which areas are of particular interest for the BMW Group. This covers both the identification of the best opportunities and the biggest threats to the organization. The SWOT analysis will put things into perspective by identifying, which threats and opportunities should be dealt with right now and which should be a concern for the organization in the future.
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right away, rather BMW should keep these combinations in mind for the future, where they have dealt with the immediate exploitable opportunities and the most serious threats. 7.1.1 Areas with the need for change in the long run (threats/strengths & opportunities/weaknesses) Firstly, external threats are connected with the companys corresponding strength. The main issue for BMW here, is to use its strength against the threats effectively. Secondly, the external opportunities will be related to the corresponding weaknesses. This connection obliges the company to improve on its weaknesses and create a more favorable situation, where the opportunity can be explored. Threats and Strengths New legislations as e.g. ELV directives or increased emissions standards are a major threat to the companys profitability. However, BMW can easily turn this into an advantage against its competitors, since they possess significant innovative capabilities within the area of green driving. The price of raw materials is very volatile and is therefore not predictable for the company, but with the companys in-house financing division they should be able to handle the threat by focusing their efforts on reasonable hedging. The emerging economies are creating huge markets not only for established manufacturers as BMW, but also for new entrants. At the moment the biggest threat in this area stems from the Chinese market, where several producers are grasping the benefits of economies of scale. However, BMW, as an established company has the advantage of having good market knowledge and distribution channels. Interest rate risk is a major threat to the company, since the interest rate is historically low at the moment and is likely to increase in the future. Moreover the company is threatened by the current high amount of debt, corresponding to a D/V ratio of 74.24%. Further BMWs downgrading by Standard and Poors reflects negatively on their ability to obtain cheap loans. Standard and Poors even give BMW a negative outlook for the future, hence there is a risk of BMW being downgraded even more. In such a globalized company as BMW, currency risk is a major concern. BMW has however established several initiatives to bring it down. One way was through natural
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hedging another is by financial hedging. BMWs strength in this connection is their expertise in the area of financing through their in-house financial department.
7.1.2 The combination of opportunities with weaknesses As discussed previously, BMW has the opportunity to enter emerging markets, where growth prospects are good. However, BMW has a weakness, when talking about two of its brands; Mini and Rolls Royce. These two brands are exclusively produced in Great Britain, i.e. BMW has to incur high shipping cost, when supplying emerging markets in e.g. Asia. A strategic choice might be to establish a production facility in Asia, which is followed closely by the division in Great Britain. The close contact will ensure that cars produced at this facility live up to Mini and Rolls Royce standards and further create the possibility for a close market contact. BMWs favorable standing in the eyes of consumers, through its valuable brands, poses a great opportunity for charging premium prices on their cars and thereby earning a higher margin than e.g. on volume produced cars. However, since BMW is only involved in the premium segment of automobiles they are not able to obtain the same economies of scale as volume producers are. BMW therefore has the weakness of having relatively higher cost associated with each of their cars. One of the biggest issues in this connection is R&D costs, which for producers like BMW represent a significant amount of cost. 7.1.3 Opportunities exploitable right away (opportunities/strengths) The demand for greener technology is increasing at the moment, posing an especially big opportunity to BMW, since they are on the forefront of green solutions through their leadership of the Dow Jones sustainability index. The fact that China is now the biggest single market for automobiles is a big opportunity for the BMW Group. Through the utilization of their strong brand image and their strategic alliances with Chinese partners, they should be well equipped to benefit from the opportunity. Moreover, does the demographic change in emerging markets lead to a growing middle class which is a core market segment for BMW. They can explore this opportunity by drawing on their strong brand image and their market knowledge.
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The increased demand for leasing agreements and other activities performed by the financing department is creating a possibility for BMW to increase its activities in this area and further diversify their operations. BMW should be able to grow their financing department through their good connection to qualified employees and their strong cash flow position. (Trendence, 2008)
7.1.4 Serious threats (threats/weaknesses) A return of the economic recession in Europe and the US is threatening the BMW Group. The company is very dependent on these two markets, since they stand for about 80% of the companys revenue. A solution to this problem might be the differentiation into emerging economies, where growth prospects are good. The recent copyright infringements by some Asian car manufacturers poses a big threat for BMW, since it undermines their growth prospects in emerging economies. There is no obvious way to solve this problem, since suing for copyright infringements will only yield to a satisfactory result in countries, which enforce laws against copyright infringements. Political instability in some emerging economies is a threat to the companys operations. BMW can however not leave out the chance to grow in emerging economies, since these through their size will represent a future core market to the company. When entering emerging economies it will be a good idea for BMW to establish a connection to a local supplier in order to ensure the close customer contact and a legal secure basis.
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for BMW at the moment are the opportunity of exploring their green image further, growing in emerging markets and extending their leasing activities. The most serious threats are the possibility of a reoccurring recession, political instability in emerging markets and copyright infringements. Even though the just mentioned factors are graded as serious threats, they are not evaluated to require an immediate response by BMW, because they seem very uncertain. In total the need for reaction on threats must be evaluated as low, but the potential for the exploration of opportunities, as high.
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lot at the moment and BMWs strategic choices are not predictable. In the short term forecasting, the values of forecast drivers and the corresponding historical financial numbers are held close to each other. Frequent approaches were either to set the historical average equal to the forecast driver value or to give the forecast driver the value of the last financial period. The medium to long run is forecasted through ratios, which are almost all held up against revenue. For this reason the forecasting of revenue has a very high priority and its accuracy determines almost all other numbers.
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The regression analysis provides an immediate revenue growth of 14.09% in year 2010. This number was assessed to be unrealistically high and hence the growth coefficient was adjusted to reflect revenue growth more reasonably. The original regression line and BMWs revenue for 2009 were used to obtain a second regression line. This line goes from the actual revenue level in 2009 to the predicted revenue in 2014. The correction seems in line with world GDP growth and it reflects BMWs current potential in the market place. For the remaining period from 2015 and onwards the growth numbers correspond to the world GDP growth. For the prediction of world GDP the report builds on numbers from the OECD economic department published in the start of 2010. (Duval, 2010) The only adjustment has been to reduce BMWs revenue growth by 2% for the long run. This is done in order to stabilize BMWs revenue growth. Moreover, it reflects the future market situation better, because the automobile market is going to mature more and more, when the developing countries are explored. When no more unexplored markets exist, BMW Group has to get its revenue growth through increasing its market share or moving into other markets.
Table 8-1 - World GDP Growth and BMW revenue growth
2011 5.0%
2012 4.8%
2013 4.5%
2014 4.3%
2015-25 3.6%
20253.4%
5.3%
5.0%
4.8%
4.5%
4.3%
3.6%
2%
8.2.2 Cost of goods sold The average of cogs to revenue in the period from 2005-2010 has been around 78%. However, before the crisis, the cost of goods sold was lower. On one hand the increase in raw material prices of metals and oil will increase and thereby increase costs for the company. On the other hand BMWs recent focus on cost reduction and the fact that fixed costs will not increase proportionally to revenue growth, because there is excess capacity at the moment, will contribute to a decreased cost to revenue ratio. Assumingly, the cost of goods sold will stay at a level of decline to a level of 77%.
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8.2.3 Sales and administrative cost Cost for sales and administration have been around 10% of revenue for several years and since no significant changes to sales and administration were identified in the strategic analysis, this is used as an indicator for the future. 8.2.4 R&D expenditure R&D expenditure is historically low for BMW at the moment with 4.83% of revenue. Due to R&D importance in the industry, which was previously found in the KFS analysis, BMW is assessed to focus more resources at R&D, when their revenue normalizes and profits allow for increased investments. The average R&D expenditure to revenue ratio has been 5.2% from 2005-2009 and is for the future predicted to be a little higher at around 5.3% of revenue. 8.2.5 Other operating income and expenses Historically, operating income and expenses have nearly equaled out. Over the period from 20052009 operating income had a low volatility. It averaged 1.8% of revenue and operating expenses averaged 1,4% of revenue. Hence, net operating income is set equal to its historical average. 8.2.6 Equity investments Equity investments account for BMWs interest in a Joint Venture with BMW Brilliance Automotive Ltd., Shenyang. The operations in emerging markets, like this one is, was in the strategic analysis found to be a good opportunity for future growth. It is therefore expected that equity investments will increase slightly in the short run. 8.2.7 Interest estimates Interest expenses and income are expected to stabilize in the long run. They might however increase slowly in the short run, since interest rates according to the strategic analysis are at historical low and BMW is about to get downgraded by financial bureaus (BMW AR, 2009). 8.2.8 Other financial results Other financial results have been set to zero, because this is not only the historical average, but also the expected outcome derived from the strategic analysis, where increased natural hedging would contribute to bring down the use of derivative instruments. Derivative hedging will still be used by the BMW Group, but it is assumed that derivative hedging is solely used to hedge and hence there will assumingly be no profit or loss from these activities. Page 60 of 93
8.2.9 Income taxes In 2008, BMW used a lot of their deferred tax assets, to gain a higher profit. This is an explanation for the fluctuation in the income taxes to EBT ratio. The historical revenue obtained from 20052009 will therefore underestimate BMWs tax expenses. The tax expense is therefore adjusted upwards to give a more realistic picture of taxes expected for the future. Taxes are predicted to take up 30% of revenue in the short run. This is a bit over the historical average, but below the statuary tax rate in Germany. It is set below the German statutory tax rate, because BMW had income in other countries, where tax rates are lower.
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8.3.5 Liabilities Most other liabilities were predicted to stay at their 2009 level for the future. The increase in equity value, but constant debt tries to catch the fact that BMWs equity started at a very low level and for the future is expected to catch up with liabilities and hit the target debt to company value ratio of 60%. Another reason for keeping debt constant is BMWs ability to fund investments through the usage of cash and cash equivalents, which are brought down under the forecast period. In order to reconcile BMWs forecasted balance sheet, excess cash has been used as a plug account where differences between assets and liabilities are balanced out.
The following forecast drivers are used in determining the long term and continuing value of operations: revenue growth, growth in invested capital, NOPLAT growth, depreciation and investment in goodwill & intangible assets. 8.4.1 Revenue growth Revenue growth was outlined in the short term forecast and values are kept at their previously predicted rates. 3,6% for the long run and 2% for the continuing value period. 8.4.2 Growth in invested capital The growth in invested capital is assumed to increase with 5% per anno, which is in line with the historical average and the intention of BMW to grow its operations. 8.4.3 NOPLAT growth NOPLAT growth is assumed to stay at a level equal to revenue growth, because NOPLAT is a direct function of revenue. 8.4.4 Depreciation For the long run and the continuing period, depreciation on fixed assets is equal to 20% of Property Plant and Equipment (PP&E). PP&E has been forecasted to grow at a rate, which is equal to its historical average. This is in line with the companys intention to grow its business.
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8.4.5 Investment in goodwill & intangible assets The new investments in goodwill & intangible assets are assumed to grow proportionally with revenue. Historical evidence indicates that 2% of revenue is a fair estimate for the future investments in goodwill & intangibles.
8.5 Valuation
This sub chapter handles the real valuation of BMW. The valuation enables an assessment of the market value of the BMW Group. The market value will be a result of conclusions drawn upon from the historical- and financial analysis. Finally, the market value, will be split up in equity belonging to the owners of preferred- and common stocks, respectively. The result should be a final estimation of stock prices for both preferred- and common stock. 8.5.1 Summary of valuation First, BMWs operating value was calculated to be 65,698 mio. , which was further adjusted by a factor of 1.033 in order to adjust for the generation of FCF throughout the year. Before the adjustment factor was applied, the generation of free cash flows were seen as only taking place in the very end of the year. This was of course not correct and was therefore altered. The final value for BMWs equity value became: 67,862 mio. . This value was both established through the DCFand the EVA method. A problem with regards to the valuation of the companys operating value is the high amount of value generated in the continuing value period. The continuing value period takes up 49.55% of total operating value creation. The high value of the continuing period and the high uncertainty connected to predicting events, which are so far out, once more acknowledges the uncertainty in the valuation. When talking about the EVA and DCF calculations in detail it must be mentioned that no values are negative. This is probably not realistic, but since modest values, which stem from historical averages, have been used throughout the valuation, future peaks and down will simply be smoothed out. Hence, the valuation numbers should not be seen on a year to year basis, but rather as a big picture where the averages over the forecast period are as close as possible to the expected averages. To illustrate the difference between the EVA- and the DCF principle, the years 2019 and 2020, which are reverse in terms of EVA and DCF, will be looked at. Even though it is expected that 2020
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generates a higher free cash flow than 2019, the economic value added is expected to be higher in 2019. This is due to investments in capital, which are higher in year 2020 than in 2019. The market value of BMWs equity value is estimated to be 31,968 mio. (Appendix 9).
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A clear advantage of preferred shares is that they are entitled to receive more dividend per year than common stock owners. A preferred stock yields 0.02 more per share than a common stock. When only looking at the dividend yield and discounting it back, preferred stocks should be worth more than common stock. Another factor that usually counts towards a higher value for preferred stocks is the smaller credit risk associated to it (Horner, 1988). However, in the case of BMW, the owners of preferred stocks will not be paid before common stock owners in case of bankruptcy. The underlying strategic principle of issuing preferred shares is the creation of additional working capital through a equity issuance. In conclusion, two different stock classes enable a company separate cash flows from control of the organization (Bebchuk, Lucian et al., 2000). A lot of research in the area concerning the price differential between stock classes, centers around the voting right difference. Research has shown that voting power has a significant impact on the price of a stock (Barcley and Holderness, 1992). A German research, which also concerned BMW gave a result of 26% price premium on shares with an associated voting right compared to the corresponding non-voting shares (Hoffmann-Buchardi, 1999). Contrary to these finding, other research has focused on the liquidity of different shares as a driving factor in the price difference (Neuman, 2003). No quantitative results were made available about the exact impact of liquidity on the stock price, which makes it difficult to use this factor in valuing the different stock classes. It is however assumed that liquidity will have some kind of impact in favor of BMWs common stock, since common stock is traded in a much higher volume (BMW AR, 2009). In order to clarify the above mentioned factors, these will be placed in context. Two different scenarios will be outlined in order to explain the factors in more detail. The first scenario is: BMWs dividend payout is ensured and the company is able to satisfy its investors by living up to the required return on invested capital. The investors will be confident in the companys operations. In the second scenario the company is struggling. It can hardly make the dividend payments and general market conditions are uncertain. The investors react either by selling the stocks or else they want to engage more in the company and hence contribute to the companys well being. In the first scenario, which corresponds to BMWs and the markets situation before the financial crisis set in, the investors want to get as much out of their investment as possible in terms of monetary refunding. The conclusion of this is that more and more investors want to buy preferred
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shares rather than common shares. The increasing demand for BMWs preferred shares increases its price and hence makes it approach the common stock in terms of its market price. Another way of saying it could be: Investors see that the company is doing well, so there is no need to intervene through the usage of voting power. The focus is shifted from the voting power and liquidity, to the pure dividend yield. Exactly the same as just described, happened in 2007, when the market and company had a positive outlook and investors thought everything was going well. The opposite is seen in the second scenario, which corresponds to their current standing. The market prices of the two stock classes are no longer close to each other and the common stock is at the moment worth ca. 30% more than the preferred stock (Appendix 10). In conclusion, the relationship between the prices of common stock and preferred stock must be regarded as difficult to assess and dependent on many factors. The voting right, liquidity and dividend yield are found to be the most important factors for explaining the price differential. These factors must however always be seen in their economic context, which both encompasses the environment and the company. The relationship between the two stock classes has obviously not been constant over the past, but due to the indication that BMWs current outlook might have a big impact on the relationship between stock classes, the relationship on the 17th of March 2010 is taken as an estimator for the relationship between BMWs stock classes. The establishment of a market value for the two stock types will hence be based on the relationship between the preferred and common stock price on the 17th of March 2010. The price differential of ca. 30% at the moment seems in line with the identified factors. 8.6.1 Valuation of different stock classes The price of the two stock classes was calculated to be 35.70 for preferred shares and 50.22 for common shares (Appendix 11). Both values lie over their respective market prices. Several sources, which could have lead to a wrong estimation of BMWs value have been identified throughout this report. The prime source of error is the subjectivity, which is an inbound part of estimating forecast drivers.
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sensitivity analysis will be conducted on the variables weighted average cost of capital (WACC), cost of goods sold (COGS), long term revenue growth and continued value growth. The variables are chosen on the basis that they are very important for the development in the equity value. The sensitivity analysis is create, so that it can partly substitute scenario analysis. This was done by making data tables, two dimensional, so that two variable were allowed to change at the same time. In the following the results of the sensitivity analyses will be presented. Each variables influence will be evaluated on a ceteris paribus basis. For the combined effects of e.g. the WACC and COGS on equity value see appendix 11. On the basis of a equity value of 31,968,453,605, the variables are evaluated. From the table below it can be seen how the equity value changes, when WACC is varied by one percentage point at a time.
Table 8-1 - Changes in common share price by WACC
WACC values 3,69% 359% 4,69% 150% 5,69% 55% 6,69% 0% 7,69% -36% 8,69% -61% 9,69% -79%
From the table it can be seen that the WACC has a major influence on the equity value of the company. In the span of the 6 percentage points the equity value changes by more than 400 percentage points, which is an enormous change. The cost of goods sold is the single largest cost of the company. This makes it an interesting variable to investigate further. From the table below the equity value based on different cost levels for the company is presented.
Table 8-2 - Changes in common share price by COGS
COGS values 74% 93% 75% 62% 76% 31% 77% 0% 78% -31% 79% -62% 80% -93%
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The percentages of the COGS are of company revenue. Again the variable is changed by 3 percentage points. The 6 percentage point span results in an equity value span of 186 percentage points. The development in the equity value is linear in its relation to the share price, with an increase/decrease of 93% in both directions. This shows that the companys equity value is significantly influenced by changes in the COGS level. The following two variables determine the expected growth in value. These variables are very interesting to examine since much of the value of the company is based on these estimates, so the sensitivity of company value on these variables is very interesting as it tells something about the robustness of the model.
Table 8-3 - Changes in common share price by revenue growth
Long term revenue growth 0,6% -80% 1,6% -56% 2,6% -29% 3,6% 0% 4,6% 31% 5,6% 65% 6,6% 102%
Continued value revenue growth 0,5% -25% 1,0% -18% 1,5% -10% 2,0% 0% 2,5% 13% 3,0% 28% 3,5% 49%
It should be noted that the two lines are separately calculated. A value of e.g. 1% in continued value growth is based on a long term growth rate of 3.6%. The long term revenue growth is changed by 3 percentage points whereas the continued value growth is only changed by 0.5 percentage points. There is a slight dissymmetry in the value of the equity. This means that the equity value increases more if revenue is growing than if revenue is falling. This is caused by the discounting of free cash flows. As revenue falls more and more of the company value is derived from the current operations e.g. the percentage that the continued value makes of the company value will be smaller and smaller. In conclusion the equity value is found to be significantly influenced by the change of the variables. Especially the WACC proved to be very influential, which is consistent with the valuation technique of discounting cash flows by the WACC.
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9 Conclusion
The purpose of this report was to estimate the market value of BMWs equity. Moreover, the market value of the two stock types should be found. The values were found using a DCF- and an EVA method. These methods built on forecasts, which were grounded in both a financial and a strategic analysis. The report started out with reorganizing the financial statements. Invested capital, NOPLAT, FCF, ROIC and revenue growth were found and their implications for the companys future were assessed. Despite the negative development in the above mentioned ratios, the fact that BMW has been able to generate a positive net profit throughout the crisis, yields a positive outlook for the forecast period. The development in the FCF was also positive. It increased to 4,859 mio. in 2009. The increase in FCF stems from a decrease in invested capital and has a positive impact on the company, since it allows for flexibility in operations. The current WACC was estimated to be 6.69%. The strategic analysis was divided into two parts: External and internal. The external analysis started with outlining the turbulence in the market at the moment. The market was evaluated to be changing but still partly predictable. Afterwards the general environment was described in a PEST analysis. The overall impact of the general environment was evaluated to be almost unchanged in the future. There were however changes in the areas of socio-cultural and economic factors. Due to an expected increase in the demand for green products, socio-cultural factors were assessed to have a more positive impact in the future. Contrary, the economic factors were due to higher raw material prices evaluated to have a more negative impact on the organization in the future. The premium car market in particular was evaluated in Porters five forces. The conclusion was that BMW would face a bigger threat from factors, directly related to the premium segment, in the future. The increased threat is derived from the assumption that car producers from emerging markets might enter the premium segment in the future and due to their large economies of scale they will have an advantage in terms of costs compared to BMW. The strong brand and BMWs R&D experience are however assessed to keep BMW competitive in the market. After the external analysis was finished off, the internal resources were analyzed. These were analyzed according to the 7S model and finally evaluated in a VRIO Framework. Branding, innovative capabilities and the experience with sustainable solutions were found to yield sustainable competitive advantages for BMW.
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In order to combine internal and external factors, key factors of success were looked at. The prime factor for success in the premium automobile segment was found to be branding. Other factors, which are determinants of success are: Innovative skills & technical capabilities, low costs in production and liquidity. Finally, the factors from the internal and external analysis were brought together in a SWOT analysis. The most important strategic factors were combined in order to identify BMWs strategic position. Important opportunities in the SWOT analysis were the focus on a green image, growing emerging markets and an increased need for leases. The biggest threats were identified to be: A reoccurring recession, political instability in emerging markets and copyright infringements. The critical SWOT analysis concluded that BMW was not in a situation where changes were needed immediately. After the SWOT analysis, the actual valuation was taken care of. First forecast drivers were estimated on the basis of the strategic and historical analysis, second the forecast drivers were used to establish values for free cash flows and economic profits. The result of the valuation was a market value for equity of 31,968 mio. . The equity value was used in a valuation of the two different stock classes. Before the valuation of the stock classes could be undertaken, the price differential between the stock classes was explained. The price difference was found to be highly influenced by voting rights, liquidity and dividend yield. These factors lead to the usage of the current relationship between the market price of the two stock classes, as an estimator. The valuation gave a preferred stock price of 35.70 and a common stock price of 50.22 . In order to account for the change in variables, a sensitivity analysis was carried out. The three factors, which had the biggest influence on the equity value were COGS, revenue growth and WACC. The conclusion was therefore that the equity value is highly sensitive to changes in certain variables and that deviations from the expected values for these variables, would result in a significantly different equity value and corresponding stock prices. In total the result is that if all assumption throughout the report hold, both BMWs stock classes are undervalued. The preferred stock was undervalued with ca. 12 , whereas the common stock was undervalued with ca. 18 .
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10 Bibliography
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BMW Group: BMW frontpage. http://www.bmwgroup.com/e/nav/index.html?../0_0_www_bmwgroup_com/home/home.html&sou rce=overview, visited on 2nd March 2010 BMW Education: BMW Marketing. http://www.bmweducation.co.uk/coFacts/linkDocs/marketingSponsor.asp, visited 5th of march 2010 BMW Publications. The Fascination of Production. http://www.bmwgroup.com/e/nav/index.html?../0_0_www_bmwgroup_com/home/home.html&sou rce=overview, visited 3rd of March 2010 Bruner, Robert F., Eades, Kenneth M., Harris, Robert S. & Higgins, Robert C. (1998). Best practices of estimating cost of capital: Survey and Synthesis. Financial Practice & Education, Vol. 8 Issue 1, p13-28 Chinadaily: Public perception of Daimler phttp://www.lexisnexis.com.www.baser.dk/us/lnacademic/results/docview/docview.do?docLinkInd =true&risb=21_T8789154331&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlK ey=29_T8789145643&cisb=22_T8789154337&treeMax=true&treeWidth=0&csi=227171&docNo =17 , visited on the 5th of February 2010. Datamonitor (2009). Company profile Volkswagen AG. Datamonitor Report published 15th March 2009. Datamonitor (2009). Company profile Daimler AG. Datamonitor Report published 31st July 2009. Datamonitor (2009). Company profile Toyota Motor Corporation. Datamonitor report published 2nd March 2009. Dow Jones: Sustainability index, http://www.sustainability-index.com/, visited the 4th of march 2010. Duval, Romain (2010), Long run growth scenarios for the world economy, OECD report. Journal of Policy modeling. Vol. 32, Issue 1. Published Jan. 2010. Environment Agency: End of life vehicle directive, http://www.environmentagency.gov.uk/business/regulation/31887.aspx, visited the 10th of February. Eugene F. Fama & Kenneth R. French (1992), The cross-section of Expected Stock Returns, Journal of Finance vol. XLVII, No. 2, June 1992 Euromonitor: Chinas middle class reaches 90 mio.. http://www.euromonitor.com/Chinas_middle_class_reaches_80_million, visited on the 7th of February. European Union Environement: Reducing CO2 emission from light duty vehicles. http://ec.europa.eu/environment/air/transport/co2/co2_home.htm Visited on th2 14th of February 2010. Fama, Eugene F.; French, Kenneth R. (1992). The cross-section of Expected Stock Returns. Journal of Finance, Jun92, Vol. 47 Issue 2, p427-465, 39p Page 73 of 93
German Corp. Gov. Codex: Deutscher Corporate Govervance index,http://www.corporategovernance-code.de/ger/download/kodex_2009/D_CorGov_Endfassung_Juni_2009.pdf, visited the 5th of March 2010. GM Hydrogen Beyondfosilfuels.com: www.beyondfosilfuels.com. http://www.beyondfossilfuel.com/hydrogen/chevy_equinox_010908.html, visited 6th of March 2010 Golf Today: Golf Today News. http://www.golftoday.co.uk/news/yeartodate/news05/bmw.html, visited 5th March 2010 Guardian (2009), MG Rover: Phoenix Four had secret plan to share BMW's 75m. http://www.guardian.co.uk/business/2009/sep/11/mg-rover-report-phoenix-four, visited the 5th of February 2010. Hoffmann-Buchardi, U. (1999), Corporate governance rules and the value of control: a study of german dual class shares, FMG Discussion paper, London School of Economics. Horner, M. (1988), The value of corporate voting right, Journal of Banking and Finance, Vol. 3, pp. 69-83. IMF (2009), Contractionary forces receding but weak recovery ahead. World economic outlook. International monetary fund. Published the 8th July 2009. Ingeniren: Ingeniren nyheder. http://ing.dk/artikel/93194-usa-bloedende-bilindustri-kraever-25milliarder-dollar - Ingeniren 10/11-2008, visited 6th of March 2010 ISO.org: International standards for Business, Government and Society, http://www.iso.org/iso/home.html, Visited the 8th of March 2010. Koller, T., Goedhart, M. & Wessels, D. (2005). Valuation: Measuring and Managing the Value of Companies. McKinsey & Company, 4th ed. , John Wiley & Sons. Lynch, Richard (2009), Strategic Management, 5th edition, Pearson education limited. Lgaard, Jrgen (2003), Strategi I vindervirksomheder, 2nd Ed. Narayana Press. Metalprices: World prices for metal. www.metalprices.com, visited on the 2nd of February 2010. Miller, Scott E. (2007), Valuing preferred Stock. Journal of accountancy. Section: Business & industry / Business valuation. Moffett, Michael (2008), Fundamentals of Multinational Finance, Third Edition. Pearson International Edition. Prentice Hall. Neuman, Robert (2003), Price Differentials between Dual-ckass Stocks. Voting Premium or Liquidity Discount?. European Financial Management, Vol. 9, No. 3, 315-332. Ohmae, K. (1983), The Mind of the Strategist, Penguin, New York, NY. OICA-Organisation Internationale des Constructeurs dAutomobiles: Production Statistics. www.oica.net - http://oica.net/wp-content/uploads/world-ranking-2008.pdf, visited 4th of March 2010
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Peridy, Nicolas J. & Abedini, Javad (2008). The growing influence of emerging countries in the world car industry: an estimation of export potentials in a world trade model. Global Economy Journal vol. 8, issue 3, article 5. Pistonheads: Fiat/BMW alliance, http://www.pistonheads.com/TVR/default.asp?storyId=18347, visited the 4th of February. Pressebox: The BMW Group at the UN Climate Change Conference in Copenhagen, http://www.pressebox.com/pressreleases/bmw-group/boxid/309188, visited the 12th of February 2010. Reuters: Reuters article. http://www.reuters.com/article/idUSL3133768120080531, visited 6th of March 2010 Robert F. Bruner, Kenneth M. Eades, Robert S. Harris & Robert C. Higgins, Best practices of estimating cost of capital: Survey and Synthesis, Financial Practice and Education, Vol. 8, No. 1. The Economic Times: Steel prices likely to rise 5% in April. http://economictimes.indiatimes.com/news/news-by-industry/indl-goods-/-svs/steel/Steel-priceslikely-to-rise-by-5-in-April/articleshow/5567234.cms. Visited the 2nd of February 2010. Trendence (2008). Das Deutsche Schlerbarometer: Trendence Schlerbarometer 2008. Umwelt-plakette: Daten und Fakten. http://www.umwelt-plakette.de/umweltzone%20berlin.php, visited the 17.April 2010. Waterman, R. Jr., Peters, T. and Phillips, J.R.(1980) Structure Is Not Organization in Business Horizons, 23,3 June 1980. 14-26. Welt 2007: BMW muss sich neu finden ,http://www.welt.de/welt_print/article1140152/BMW_muss_sich_neu_erfinden.html, published on the 27th August 2007.
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11 Appendices Appendix 1 Structure Appendix 2 10-year German Government Bond Appendix 3 Regression analysis of Beta Appendix 4 Degree of Turbulence (DOT) Appendix 5 Quantification of PEST analysis Appendix 6 Quantification of the five forces analysis Appendix 7 The VRIO Framework Appendix 8 Regression analysis of revenue growth Appendix 9 DCF and EVA approaches to valuation Appendix 10 Historical overview of stock prices Appendix 11 Calculating stock prices Appendix 12 Sensitivity analysis Appendix 13 SWOT overview Appendix 14 Word count
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Appendix 1 Structure
Preface Executive summary Brief introduction Problem statement Structure methods Assumptions and Delimitations
Introduction
Historical analysis
Analysing invested capital Analysing NOPLAT Analysing the free cash flow reinvestment ratios Return on invested capital Analysis of revenue growth Capital Structure Peer Group financial ratios
Strategic analysis
External analysis The degree of turbulence PEST Porters five forces Internal analysis Key factors of success Critical SWOT
Valuation
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Model-formulation: . where n = 75
Source: Own Calculations on DataStream data
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where, Y is the monthly share price development for BMW AG in % month on month X1 is the monthly development of the DAX30 Performance Index in % month on month Before we start testing whether DAX30 is useable in predicting the share price of BMW, we have to make sure the assumptions for the test are valid. Assumptions: 1: The error-terms are normally distributed ~ Normally Distributed
Figure 2 - Normal Probability Plot
Sample Percentile
Source: Own Calculations This assumption is assumed fulfilled as the standard residuals roughly follow the trend line with equal amounts of observations above and below the line, especially if we disregard the few outliers in both ends.
2: E() = 0, i.e. E(Y) = 0+1*X1 Linearity of the model This states that the relationship described by the model, has to be linear. If we plot the %-change in BMW share price against the standardised residuals, then we get the following output:
Figure 3 - BMW Plotted Against Standardised Residuals
This shows a linear development between the two and the assumptions is therefore assumed to be fulfilled.
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3: The variation in the error components must be constant and independent of the explanatory variable DAX30 Performance Index in % month on month.
Figur 4 - Variation in the Error Components
4 Standardised Residuals -1
-0,2
-0,15
-0,1
-0,05
0,05
0,1
0,15
0,2
-6 Predicted Values
When plotting the Standardised residuals against the predicted values, as done above, we see that there is no pattern forming in the cluster. This suggests that there is no problem with heteroskedasticity and the assumption is therefore assumed to be fulfilled. 4: Cov(i,j) = 0 for i j ~ Independent error components
Source: Own Calculations
The assumption assumes that there is no connection/pattern between the individual error terms that they are independent of each other. Plotting the standardised residuals along the x-axis gives the following picture.
Figure 5 - Independent Error Components
4 -1 -6
There does not seem to be any particular pattern in the error terms and the assumptions is therefore assumed to be fulfilled. The regressions output from excel:
Tabel 4 - Regression Output
SUMMARY OUTPUT Regression Statistics Multiple R 0,733545782 R Square 0,538089414 Adjusted R 0,531761872 Square Standard Error 0,054780327 Observations 75 ANOVA
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MS 0,25519293 0,003000884
F 85,039
Significance F 0,00
Lower 95%
Upper 95%
From the output we are able to define the model in the following way: Y = -0.0009 + 0.9555*Xi + We want to test whether slope in the model is significant, in other words whether we can use the beta value of 0.9555 for BMW on the DAX30 Performance Index. Hypothesis testing: 1: Formulation of Hypothesis: H0: 1 = 0, the line is not useable H1: 1 0, the line is useable 2: Significance level: = 5% or 0.05 3: Choice of Test Statistic:
4: Test Statistic: The test statistic is given in table 1 and is: t = 9.2217 5: Critical Value: tobs = 9.2217 < t75-1-1, /2 = 9.2217 < t73, 0.25 = 9.2217 < 1.994 False! We reject H0! 6: P-Value: Again using the table we can see that the p-value is practically 0, which means that it is a strong rejection of the H0 hypothesis indicating that the line is useable. 7: Conclusion: We reject H0 and continues to use DAX30 Performance Index as explaining the development in the share price of BMW.
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Extrapolable
Appendix 5 Quantification of PEST analysis Political factors Enforcement of new laws Political (in)stability Total average Past 3 2 2.5 Short run 2 3 2.5 Long run 2 3 2.5
Economic factors GDP increase Interest rate risk Currency risk Cost of raw materials Cost of crude oil Total average 5 1 2 2 2 2.4 4 2 3 3 3 3 2 3 4 4 4 3.4
Predictability
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Socio-cultural factors Growing middle class Demand for green products Total average 3 3 3 2 2 2 1 2 1.5
Grand average
2.475
2.375
2.35
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Buyers Backward Integration of Costumers Switching Costs Leasing Agreements Total Average Substitute Products Bicycles etc. Other Car manufacturers New Technology Total Average Suppliers Market Prices Production Network Dependency Total Average Grand Average 5 3 4 4 2.16 5 3 4 4 2.602 5 3 3 3.67 2.908 1 4 1 2 1 3 1 1.67 1 3 2 2 1 2 3 2 1 2 2 1.67 1 2 2 1.67
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Valuable?
Rare?
Competitive implications
NO YES
NO
NO YES/NO
Resource
Headquarters in Munich Good distribution channels Market knowledge Partly decentralized company structure Close contact with qualified suppliers Worldwide production facilities In house financial department Access to highly educated employees Partnership with Fiat Brand portfolio Strong brands Innovative capabilities Focus on sustainable solutions
YES
YES
NO
YES/NO
Above normal
YES
YES
YES
YES
Above normal
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Model-formulation: . where n = 75 i = 0 + 1 * X1 + where, Y is the yearly revenue of BMW in million Euros X1 is the World GDP in US billions Before we start testing whether World GDP is useable in predicting the revenue of BMW, we have to make sure the assumptions for the test are valid. Assumptions: 1: The error-terms are normally distributed ~ Normally Distributed
BMW Revenue / Mio
Sample Percentile
This assumption is assumed fulfilled as the standard residuals roughly follow the trend line with equal amounts of observations above and below the line. 2: E() = 0, i.e. E(Y) = 0+1*X1 Linearity of the model This states that the relationship described by the model, has to be linear. If we plot the BMW revenue against the standardised residuals, then we get the following output:
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2 1 0 -1 -2 -3
10.000
20.000
30.000
40.000
50.000
60.000
This shows a linear development between the two and the assumptions is therefore assumed to be fulfilled. 3: The variation in the error components must be constant and independent of the explanatory variable DAX30 Performance Index in % month on month.
2 1 0 -1 0 -2 -3 10000 20000 30000 40000 50000 60000
When plotting the Standardised residuals against the predicted values, as done above, we see that there is no pattern forming in the cluster. This suggests that there is no problem with heteroskedasticity and the assumption is therefore assumed to be fulfilled. 4: Cov(i,j) = 0 for i j ~ Independent error components The assumption assumes that there is no connection/pattern between the individual error terms that they are independent of each other. Plotting the standardised residuals along the x-axis gives the following picture.
5 0 -5
There does not seem to be any particular pattern in the error terms and the assumptions is therefore assumed to be fulfilled. The assumptions are assumed to be fulfilled. It should be noted, however, that the number of observations is very low, which could influence the estimated numbers. This is assumed not to be the case and the number of data points is assumed to be satisfactory in giving an accurate picture of the future.
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From the output we are able to define the model in the following way: Y = 14,541.79 + 0.000664523*Xi + The model was found to overestimate the value of the 2010 revenue growth, an increase in growth of more than 14%. This was found to be too positive based on the current development in the market. The other years were found to be reasonable estimates. On the basis of the 2014 expected revenue and the 2009 revenue a linear slope was developed. This resulted in an annual increase in revenue of 2,667. This lead to the following expected revenue numbers for the years 2010-2014:
Year 2010 2011 2012 2013 2014 Expected Revenue 53.348 56.015 58.682 61.349 64.016
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Stock prices:
preferred EqV stock price Ratio pref./common 1.880.068.977 common 30.229.661.176
35,70
71,09%
50,22
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Equity value 31.968.453.605 -3,0% Long term Revenue Growth -2,0% -1,0% 0,0% 1,0% 2,0% 3,0%
COGS Values
WACC values 5,69% 6,69% 7,69% -56% -80% -97% -22% 15% 55% 98% 145% 196% -56% -29% 0% 31% 65% 102% -78% -58% -36% -12% 14% 42%
Equity value 31.968.453.605 -1,5% -1,0% -0,5% 0,0% 0,5% 1,0% 1,5% 3,69% 151% 195% 258% 359% 544% 998% 3842% 4,69% 64% 85% 113% 150% 205% 293% 454%
WACC values 5,69% 11% 22% 37% 55% 79% 112% 160% 6,69% -25% -18% -10% 0% 13% 28% 49% 7,69% -51% -47% -42% -36% -28% -20% -9% 8,69% -71% -68% -65% -61% -56% -51% -44% 9,69% -86% -84% -82% -79% -76% -73% -69%
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External Opportunities Emerging markets and the possibility of high growth in these markets Favourable standing in the consumers eyes due to their branding and marketing Focus on the environment and green technology, a continued focus on the environment in the car production, will give BMW the opportunity of increasing their sales as their cars becomes more environmentally friendly China the worlds largest car manufacturing market Positive demographic development for BMW. A growing middle aged population, which have the financial means to buy their products Increasing leasing opportunities, which gives them a possibility of diversification
Threats New ELV directive from the European union, which sets higher demand on the produced cars Price of raw materials such as the metals going into the body work of their cars. These prices are determined by the market The threat of new competitors from emerging markets a Chinese company has just bought Volvo, which is a close competitor to BMW Currency risks. The threats from uncontrollable interest rates, which the company is trying to minimise by hedging A returning recession. A returning recession would seriously hit the demand and thereby the revenue of the company Copyright infringement from Asian companies Political instability in emerging countries, makes it difficult to evaluate the possible gains of these markets The demographic development of the western countries means that the production workforce of the company will become older and older, which can reduce labour productivity in the company Consolidation in the supplier market, leading to increase dependency between the companies
Appendix 14 Word count The allowed number of pages are 70 for a group of 1-2 bachelor students. A page should not consist of more than 2,200 characters excl. spaces. The maximum limit of 154,000 characters excl spaces is therefore respected.
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