Introduction:BMW is a German Automaker with revenue sources of Financial Services and Automobile. I’m valuing mainly the automobile side of the business so I’ll go more in depth on the automobile side rather than the financial services. Note that I’m basing my DCF off on 2021’s data as 2022’s is not available yet.Revenue:Automobiles producers had a great year due to an unexpected extraordinary event i.e. Covid-19. Revenue Y/Y for 2021 was at 12.37% clearly unsustainable especially given the size of BMW. “We therefore continue to expect our higher-than-average order books to normalize” – Q3 2022 Earnings.IN 2022, revenue is unlikely to be as high as in 2021. I forecast about 8% Y/Y. Taking an in between number of what seems to be the most normalized between 2014, 2017 and 2019 where numbers were not overly shocked by US-China Tension(2018), COVID-19 (2020) or Economic Uncertainty(2013), Currency Exchange Fluctuation & Initial release of high margin model (2015) and Brexit (2016).Going forward, EVs are going to start playing a bigger role in BMW’s revenue. Taking reference from this survey done by Deloitte on EV. The main reasons for converting to an EV is lower fuel costs. So Ukraine War has thrown uncertainty into the prices of energy, I’m assuming that the EU government has taken sufficient measures to manage this uncertainty going forward so demand for EVs are not overly affected due to this uncertainty. The reasons for not getting an EVs are split between Lack of charging infrastructure, Range and charge time. Lack of charging infrastructure will be resolved over time as more governments begin ramping up subsidies for charging stations. So, the main concern is Range & Charge Time.BMW iX3 → 286 milesTSLA Model 3 → 358 miles (LONG) & 263 miles(Standard)Audi E-Tron → 222 milesJaguar I-Pace → 234 milesNissan Leaf → 226 milesChevron Bolt EV → 259 milesAll have charging times from 10% – 80% at about 30-40 minutes less Chevron.IN 2022, TLSA blows out the competition as the longer time is made up for the longer miles it stores. BMW being the second closest competitor. With the largest markets going electric, BMW has adjusted itself to fit the market’s needs and wants.So FROM 2024 to 2028, I assume that revenue y/y hold steady at 5% as consumers start their shift towards EVs around this period and BMW is ready to meet this shift in demand. If we assume that car owners own cars for 10 years, by around 2025 any new cars purchased should have the intention of being usable in 2035 when the ban is enacted.IN 2029, The auto industry seems to have a industry cycle where they enjoy 3-4 years before having a downturn presumably because of the rate at which cars are being turned over. I took the average of 2013 and 2018’s Y/Y growth as these downturns were cyclical rather than extraordinary like in 2020.TILL 2031, I don’t expect any substantial revenue increase y/y given how big the company is already, revenue y/y will taper down to the TGR.Margins:“keeps us on track for the high end of our target range of 7% to 9% for the full year.” – Q3 2022 Earnings. Management has given guidance for margins at about 7%-9% is a comfortable range to hit.IN 2022, I assume the worst case scenario at about 7%.The margins are unlikely to improve substantially due to these factors:Chip shortages.“Volkswagen believes that semiconductor supply is unlikely to meet auto industry demand until 2024.” – J.P. MorganThe elevated price for raw materials due to inflation – Yahoo! newsBMW starts producing enough EVs to enjoy economies of scale.Delivery: BEVs = 103k PHEVs = 224kCurrently, EVs(BEV + PHEV) account for 13% of delivery in BMW.IN 2025, As BMW prepares for the increase in demand for EVs , I assume that they would have began ramping up production sufficiently to enjoy economies of scales and the chip shortages have been sorted out, inflation has abated to a reasonable level. Margins improve to about 7.5%IN 2027, I assume that R&D has paid off and reduced cost sufficiently to increase margins again.BEYOND 2027, With competitors competing for the same parts of the EV, I don’t place the margins back to where it was at about 10+%, this problem is especially exacerbated as competitors are scrambling to increase EV production by 2035. So the final margins I hold at about 8.5% where BMW is able to comfortably meet in 2022 where it was beginning to feel competitors’ pressure.CapEX & D&A:TILL perpetuity, D&A is assumed to be normalized at about 10% of RevenueIN 2022, CapEX is assumed to be about 12% of Revenue. Initially it was considered using 2012 numbers when BMW first ramped up R&D for their EV. But BMW pays out dividends consistently for the past 10 years. I’m assuming that this is a going trend and so they would reinvest less back in order to meet their dividend payments.Till perpetuity, I assume that CapEX will begin to taper off to nearing equilibrium.NWC:IN 2022, NWC assumed to be at about half of 2.4% as chip shortages in 2021 lead to a lot of inventory build up as BMW wants to bulk order in advance. But since chip shortages are expected to improve, less inventory builds up compared to 2021.IN 2024, assume that the chip shortages and demand have been normalized so NWC returns to normalcy.Till perpetuity, I’d assume that the growth is unable to come from vendor’s credit. So I assume that NWC returns back to 2013 nominal amount because 2013 was before the disruption in the supply chain.Taxes:FROM 2022 to 2024, Effective taxes for BMW was 27% slightly lower than the average level of effective taxes between 2018 and 2019 because I assume BMW will be investing even more heavily into R&D in preparation for their shift towards EVs so taxes are lower for at least the 3 years, assuming they come up at least with a software usable for their EVs e.g. Self driving or a similar level of technology that TSLA implements.Till perpetuity, I assume that taxes move towards the marginal taxes in EU.Discount Rate:Cost of Debt: https://imgur.com/a/N0A5sTPCost of Equity: https://imgur.com/a/HHGslaDERP is using US’ stable market ERP as BMW’s revenue is 40% EU, 20+% US so I opted for less granularity and decided to use a blanket ERP rather than a weighted average ERP.WACC: https://imgur.com/a/r6E72wmAssumptions:War on Ukraine does not lead to bigger conflict.People drive their cars for 10 years.WACC assumed to be constant at 5.81%TGR assumed to be at RFR at 2.23%D&A assumed to be at 10% throughoutMarginal Tax Rates at 30% stay constantThe global shift towards EV remains unchanged. EU by 2035, South Korea by 2035, China 2035 new energy.The cyclical nature of the industry that affects Y/Y revenue growth gets evened out by the large number of years till perpetuity.R&D reconciliation:R&D expense is treated as an OpEX on the income statement, I’ve reconciled it to treat it as a CapEX. Reason being, R&D spending in BMW is spent on development of technology(automated driving) and development of new model. These are all benefits enjoyed for a long time. So it fits the traditional definition to capitalize cost: Spending provides benefit over a long period of time.Calculation: https://imgur.com/a/2IwPDBi“One key thing to remember is from the day the design director first puts his idea on paper to the day Job 1 or first customer car is produced it will take 5 – 10 years.“ – https://www.quora.com/How-long-do-car-manufacturers-take-to-design-a-new-car-modelASSUMED average of 7 years to create a functioning product.Calculate R&D expense for 7 yearsFigure out amortization for R&D per year for the 7 years.Going back 7 years, find out the unamortized amount each year.Summation of amortizationAverage Summation of Amortization is found from 2017 to 2021Added Average amortization to each year’s D&AR&D expense added to CapEXNOPAT + Old R&D Expense – Average Summation of Amortization.TL;DR:Automobile industry revenue is expected to grow till 6.7 Trillion McKinsey . By Market Cap, BMW has 3.5% of the market. So in 2031 of my forecast, BMW has about 2.4% of the market presumably losing market share to TSLA. Comparing historical UFCF, BMW has clearly dropped in UFCF compared with their historical amount, the reason being TSLA is now a big threat to BMW’s market share. We can’t go forward with the assumption that TSLA is invisible and BMW can continue retaining its dominance and market share just like in pre-EVs because TSLA clearly has the upper hand in EVs and is here to stay.The price I calculated is $155.61.Picture of my excel: https://imgur.com/a/cgEMCpM
