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Bubbling Earnings and Low Prices: Is It Now the Rally for Auto Stocks?

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Business could hardly be better for car groups around the world at the moment. Most corporations report record results. This also includes German car manufacturers. BMW (EMS: 519000), Mercedes Benz (WKN: 710000) and Volkswagen (WKN: 766403). All three companies posted fantastic profits over the past year and are paying record dividends to shareholders. On the other hand, if you look at the share price development in recent years, there is not much to see from the records.

Rising earnings, flat stock prices?

Stock prices are more on the ground. Does that mean all stocks have to catch up and a major rally could be imminent? Let’s take a look at the numbers first.

BMW

A few days ago, BMW presented the record results of the last financial year. At $16 billion, earnings before interest and taxes were more than triple the previous year. Sales, on the other hand, were up just over 10% to €111 billion. Therefore, BMW was able to significantly increase the profit margin.

The exact figures will only be published in a few days. But already at the end of September the profit per share was 15.39 euros. In view of this huge profit, BMW will increase the dividend to €5.80 per share. That should be a welcome change for shareholders.

Since the peak of 2017, the dividend has been cut year after year. At the current share price of €72.42, you get an incredible 8% return (as of March 11, 2022, relevant for all courses)!

Mercedes Benz

The financial year also went well at Mercedes-Benz. Sales rose 11% to €110 billion and earnings per share, excluding special items, were €10. An impressive dividend of EUR 5.00 per share can also be expected here. For the Mercedes-Benz share, 58.84 euros must currently be put on the table. This means that the yield here, at 8.5%, is even higher than its rival in Munich!

Mercedes-Benz has also had some difficult years. Like BMW, the dividend has been cut multiple times since 2017. But the days of declining earnings and dividends appear to be over for now.

Let’s go to the Volkswagen Group.

Volkswagen

Like its two competitors, VW was also able to generate record numbers in fiscal 2021. Sales increased by 12% to €250 billion and clean operating profit rose to €20 billion. So it’s no surprise there’s a big dividend here, too. This year VW will pay a total of 7.56 euros per preferred share. At the current price of EUR 146.74, this results in a return of 5.1%.

So all three stocks are extremely cheap based on last year’s earnings. This can already be seen in the extremely high dividend yields. But there is a huge catch. The industry is extremely competitive. Currently, demand is apparently much greater than the capacity of manufacturers, which is limited by logistics problems. Because of this, manufacturers can charge very high prices for their cars. But the past shows that the party can end quickly.

Is the big rally in auto stocks about to begin?

As soon as demand and supply have leveled off again, competition between manufacturers will ensure that profits for all market participants fall again. This is likely to be one of the main factors weighing on share prices. Based on last year’s earnings, stocks look extremely cheap. However, in a few years, the situation could be very different again. Therefore, a large price rally seems unlikely at first.

Bubbling Earnings and Low Prices: Are Auto Stocks Rising Now? first appeared in The Motley Fool Germany.

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Dennis Zeipert does not own any of the shares mentioned. The Motley Fool owns stock and recommends Volkswagen and recommends BMW.

Motley Fool Germany 2022

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