The best way to profit from the rise of the electric car

You don’t often see a CEO admit that his company is over-valued.

But Elon Musk, the boss of the electric car wonderstock, Tesla (Nasdaq: TSLA), did precisely that last week. He told a press event that his company had a ‘higher valuation than we have any right to deserve.’

Now I’m a fan of electric cars. I think they have a big future. But I fear that Musk is right. Tesla’s share price is too high. In fact, my colleague Matthew Partridge suggested you sell and take profits a few weeks ago.

However, I’ve found another way to invest in the potential of electric cars. It’s a company you’ve definitely heard of – and it looks rather cheap.

This well-known company could lead the electric car race

I’m talking about BMW (Frankfurt: BMW). Of course, BMW is much more than an electric car manufacturer, but that diversification is part of the attraction for me.

You see, with BMW, you get a strong core business manufacturing traditional cars. Then, on top of that, you get a very promising electric car business as well.

BMW’s first all-electric car is going to hit car showrooms next month. It’s called the i3 and it’s a compact city car aimed at younger drivers.

Despite the younger target audience, the idea is that the i3 should have as much cachet as a conventional BMW. The simplest version will cost around £25,000. The car has a maximum driving distance of between 80 and 130 miles before you’ll need to recharge your battery.

I’ve seen several positive reviews in the motoring press and BMW has already received 8,000 pre-orders for the car.

I think there’s a strong chance that electric cars will take off over the next ten years and BMW is well placed to benefit. No other manufacturer, apart from Tesla, has produced an electric car that is generating this level of excitement.

And BMW’s core business is performing well too. Total sales, including the Mini and Rolls Royce brands, may even hit two million vehicles for the first time this year.

BMW’s great achievement over the last decade has been to broaden its product range whilst not damaging its strong brand. So the company still appeals to the super-rich even though it now has a model that competes with the Ford Focus. (That ‘low-end’ model is the 1-series.)

Above all else, it’s this strong brand which differentiates BMW from so many of its rivals.

Why I’ve always avoided investing in car companies

You see, I’ve always steered away from investing in car companies for two reasons. Firstly, I don’t like investing in an industry which has too much capacity – that’s a recipe for brutal competition and low profits.

Secondly I worry that too many car manufacturers are receiving either covert or overt support from governments (which is one reason there’s so much over-capacity). In other words, the auto market is not one with a level playing field.

But BMW’s strong brand means it can cope with both of these challenges. Customers are prepared to pay a premium price for a BMW even if other manufacturers are basically dumping vehicles at super-low, unprofitable prices.

You might counter by noting that BMW’s operating profit margin has fallen by about 2% over the last couple of years – it’s now at 9.6%. But that’s not because BMW is having to cut prices in the showroom. Rather it’s a case of extra spending, which is going on developing new electric cars as well as other research and development work.

I’m not too worried about this declining margin, because it reflects increased investment which should hopefully generate bigger returns for investors in the future.

What’s more, I think BMW looks surprisingly cheap. At a share price of €81, the company is trading on an historic price/earnings ratio of just ten.

I also like the fact that BMW is still pretty much a family business – 47% of the shares are owned by the Quandt family. Family businesses tend to be good at investing for the long-term, and don’t get distracted by short-term problems.

BMW has certainly pursued a long-termist strategy for at least the last 40 years, and with the launch of the i3, it looks like that strategy is set to continue.

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