Berko: Beemers and Beetles
Friday, June 21, 2013 7:00 AM
Dear Mr. Berko:
In 2004, my wife inherited 600 shares of Volkswagen and 350 shares of BMW from her uncle who lived in Munich. You can’t begin to imagine the mess, the confusion, the legal cost and the paperwork involved to get these stocks in our name and sent to our broker in the U.S. My wife was so disgusted with the complexity that she wanted to sell the stocks and convert the shares to cash. I persuaded her not to do it. About three months ago, the aunt died, and my wife inherited 350 more shares of BMW stock. We hired a lawyer in 2004 to complete the original transfer, but he made it even worse. Can you recommend a lawyer to handle this for us? If not, then this time, I have decided that we should sell the BMW stock. My wife doesn’t care one way or the other. And I’d just as soon sell the stock, as our son-in-law always complains about BMW’s customer service. And what do you think of Volkswagen stock?
H.H., Gainesville, Fla.
I’ve sent you the name of a lawyer whom I’ve known for more than 40 years and who has a superfluity of skills and experience working with inherited assets from Germany, as well as other European countries. He’s brilliant, and I trust him implicitly. However, I must warn you that he has a face like a fried ham steak and is so devoid of emotion that he must look in a mirror to see whether he’s smiling. He speaks fluent German and, when he was one, was efficient as an MIT engineer.
This time, you’re as right as ninepins. Bavarian Motor Works (BMW.DE $69.87) was trading at $34 when you inherited it in 2004. It crashed to $16 in the debacle of 2008, but now this $76 billion-revenue company has $11 billion in cash and net profit margins of 7.1 percent and expects to earn $5.1 billion this year. Its 74,000 autoworkers are the highest-paid and among the best in the world. BMW’s revenues and profits have zoomed in the past four years; however, I believe that its shares have reached their upper trading limit and are likelier to decline.
BMW makes the cute and popular Mini line of cars, which are surprisingly quick and have a lot of legroom. BMW also produces three variations of the Rolls-Royce (imagine English luxury and German workmanship), more than a dozen variations of the classy, fast and superbly manufactured BMW, and some impressive high-performance motorcycles. General Motors, by the way, produced 29 different Chevrolets (how many choices do consumers need?) last year. But demand for BMWs in Europe has collapsed, and though auto sales in the U.S. remain strong, dealers in the U.S. (as you note) are having customer service problems. Though unit sales have increased, BMW dealers in the U.S. have reduced the number of service advisers to offset rising insurance and labor costs. An unhappy BMW owner I know in Georgia recently purchased a Lexus. And several months ago, a Mercedes-Benz dealer in Florida told me, “BMW is chasing their customers to us.” I and others believe that BMW’s revenues and profits will decline, so sell your shares and protect your gains.
I certainly like Volkswagen AG (VLKAY-$42.03), which produces $260 billion worth of Bentleys, Audis, Lamborghinis, Porsches and the amazingly ubiquitous, superbly designed and manufactured Volkswagen motorcars, as well as commercial vehicles, trucks and buses. VLKAY yields 2.5 percent, has paid a dividend in each of the past 17 years, split 10-for-1 in 1996 and then ran to $230 a share before the market crash in 2008. Today VLKAY has $35 billion in cash, 562,000 employees, a book value of $45 per share and an impressive profit margin of 10.75 percent, compared with 3.9 percent for GM. And that’s why VLKAY’s CEO earns $15 million, whereas GM’s CEO is paid $1.8 million. Trading at just six times next year’s per-share earnings of $6.85, the shares, according to an analyst and an acquaintance of mine at Fidelity Worldwide Investment (it doesn’t own VLKAY), could move to the low $60s or higher in the next 18 months.
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