Warren Buffett built a reputation as one of the greatest investors with his disciplined value investing approach. By maintaining a long-term perspective and prioritizing fundamentally sound companies with durable competitive advantages, Buffett has become a magician at finding undervalued stocks to build his multibillion-dollar portfolio.
One of those companies is BYD (BYDDY 4.08%), a Chinese electric vehicle (EV) manufacturer. Initially investing $225 million in 2008, Buffett realized this obscure automaker checked all the right boxes to take the auto industry by storm one day.
Although he recently sold some shares, Berkshire Hathaway's stake in the company remains at just under 8% and is worth more than $5.5 billion today.
While we can't go back in time and invest when shares of BYD were trading for less than $5, the company's strong performance and promising growth prospects make it an appealing investment even at its current price.
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A historic rise to the top
Starting out as a battery maker in the 1990s, the company has used this experience to build an incredibly successful EV business. Today, it is the best-selling automaker in China and is slowly closing the gap to become the most productive and profitable EV maker in the world.
After a record-breaking third quarter, it has sold more than 2 million vehicles year to date, a 76% increase from a year ago. This surge in production helped the company claim the top spot of total EV production worldwide, previously held by industry champion Tesla. Amid the surge, profits year to date grew by nearly 142% compared to last year, now at more than $3 billion.
Yet the most attractive aspect of BYD is its high profit margins, coming in at roughly 22%. The company can keep costs low due to its uniquely efficient, vertically integrated production model.
Often, the most challenging aspect of manufacturing EVs is perfecting supply chain logistics around batteries. But thanks to BYD's origins as a battery manufacturer, it can overcome a crucial obstacle that prevents many other EV makers from scaling up production.
Even better, BYD has specific divisions for every component of vehicle production, such as telematics assembly and air conditioners. This has enabled almost all components to be made entirely in-house.
Add it all up, and while it usually takes the average automaker around four years to develop a new model from start to finish, it takes BYD just 18 months.
Expanding abroad
With the Chinese market firmly in its grasp, BYD plans to expand to international markets. The company is building a factory in Thailand, which is set to begin production in 2024. In late June, it announced a new plant will be built in Brazil, while deliveries in Mexico recently started as part of a strategy to expand into Latin America.
BYD is uniquely suited for success in middle-income countries due to its expansive suite of more than two dozen vehicles at a range of price points. While it offers high-end luxury EVs, it also caters to more cost-conscious consumers, with cars like its Seagull going for less than $11,000.
It already has a considerable presence in countries such as Japan, India, Malaysia, Australia, and Singapore. Even though exports remain a small share of total sales, they are up significantly from almost being nonexistent just a year ago, and they have plenty of room to grow.
The opportunity at hand
It is easy to see why BYD is one of only two auto companies to hold a spot in Buffett's portfolio. The company has a clear competitive advantage due to its experience with battery production and its vertically integrated supply chain. In addition, it can flex its muscles even more by selling cars cheaply, putting added pressure on competitors.
BYDDY PE ratio data by YCharts; PE = price to earnings.
With international expansion only in its beginning stages and EV adoption continuing to grow, BYD is in a position to outperform over the long term. Yet today, its price-to-earnings ratio is at its lowest level in over three years.
Investors seeking to emulate Buffett's success can follow his strategy of acquiring companies with strong fundamentals at discounted prices, such as BYD. The company is well positioned to become one of the leading automakers globally, and its history of success suggests that it has long-term growth potential.
