BMW's Price Premium Is Worth Paying

APRIL 30, 2011   THE WALL STREET JOURNAL

By MATTHEW CURTIN

Europe's auto makers are proving their critics wrong. Booming emerging-market sales, successful new models, and robust pricing show the industry generating more cash than expected in spite of rising raw-material prices.

Volkswagen, Europe's biggest car maker, this week produced stronger-than-expected sales and margins. Mercedes, Daimler's luxury brand, is on course for record sales this year. Such news helped push sector shares up some 9% for the week, valuing it at an average of eight times 2012 earnings.

That is a premium to Ford Motor and General Motors, on 7.9 times and 6.4 times.

But in Europe, little capacity was closed during the recession and competition remains cutthroat. Also, many manufacturers face specific challenges.

Take Volkswagen. Its China joint ventures are humming. Demand in Western Europe is holding up well with good sales of light-commercial vehicles, a relatively high-margin business. But its liquid preferred stock trades at about seven times 2012 earnings.

One reason: Those shares carry no voting rights and VW's planned multibillion-euro merger with sports-car maker Porsche Automobil Holding remains up in the air for legal and tax reasons.

Renault, meanwhile, with more room to improve margins, is recuperating from a governance crisis, and Nissan Motor, its 44.3%-held partner, is coping with the aftermath of Japan's earthquake. And Fiat, a big bet on turning around soon-to-be 46%-held Chrysler Group, already sports a punchy 14-times multiple.

The best route for investors may be smaller, family-controlled BMW. Although it enjoys a premium rating of about 9.5 times earnings, it offers purer exposure to the structurally strong German auto sector and lacks the distraction of less profitable mass-market small cars. That is a weakness for the European operations of Fiat, PSA Peugeot-Citroën, Renault and to a lesser degree Daimler.

The danger is even BMW has won only a temporary reprieve from the capital-hungry sector's cyclicality. But with richer consumers emerging strongest from the recession, it looks like the most comfortable ride for investors.

Write to Matthew Curtin at matthew.curtin@dowjones.com