Buy low, sell high -- the mantra everyone knows and seemingly few practice, partly because we often don't know what constitutes "low" or "high." Well, consider this one a freebie. European auto sales have hit a 20-year low, and many of the manufacturers based on the continent have stocks suffering drops as well. Investors can take a closer look at these companies, as well as American manufacturers with a large presence in Europe and emerging markets. Let's try to find some bargains that may have hidden growth stories underneath.
According to the European Automobile Manufacturers Association, auto sales in the region fell nearly 6% year over year. New car registrations in May hit their lowest number since 1993. Though with exceptions, auto sales in the European Union have fallen for 18 months straight. German auto sales are down 10%.
For the opportunistic investor, these are all mouthwatering indicators of deals on the horizon.
Unemployment is still rising in various regions of the continent, which could spell for lower sales yet -- but identifying the exact bottom is not as important as buying with a comfortable margin of safety. Let's see what the options are.
BMW (OTC:BAMXF) has been hit hard, with European sales down nearly 7% year over year. In the first quarter of 2013, the company reported low-single-digit drops in revenues and earnings. EBIT margins shrank from 11.6% to 9.9%. The company trades at 8.2 times projected 2014 earnings and has an EV/EBITDA of 9.88. BMW surpassed analyst expectations in the first quarter.
Volkswagen (OTC:VWAGY) has had bad luck as well, with first-quarter profits down 38%, even though unit sales increased 5%. The company trades even more appealingly, with an EV/EBITDA of 7.7. On a trailing basis, return on equity has been an impressive 27.6%.
American investors can compare these companies with General Motors (NYSE:GM). The company has rebounded well from its 2009 bankruptcy and looks to be out from under the thumb of the government soon. If the company improves its margins (it's trying), profitability could become much, much more attractive. GM trades at 7.4 times forward earnings and has an EV/EBITDA of 5.23.
All three have two common theses that investors are wise to examine.
Whether European sales slowness continues for another few months, or even a year, investors can expect this trend to reverse course. We have seen how the U.S. reacted to its unemployment bottom and recessionary lows and can use this insight to play a similar game in Europe.
Both VW and BMW have held historically higher margins. Both companies have been spending money to increase their Asian and emerging-market presence. Coupled with weak profits at home, those margins suffer a short-term hit.
The second point is a matter of relative valuation. All three companies are relatively inexpensive (GM the cheapest, but without some of the high quality fundamentals) but have tremendous opportunity for emerging market growth -- hence the heavy spending abroad. This creates an opportunity of buying domestic company prices, already on the low end, with the promise of emerging-market growth. Typically, investors would have to pay growth prices for growth stocks -- but that's certainly not the case with these three companies.
All three warrant further investigation. At a glance, however, VW might be the most compelling pick of the three, with the Pink Sheets stock trading down nearly 13% since the beginning of 2013. VW's lines are top-notch, and the company will be able to improve operations, both foreign and domestic, in the near future.
If you believe that European auto sales can't drop much further than the current lows, then its time to do some large-cap bargain-hunting.