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If you are a shareholder in Brüder Mannesmann Aktiengesellschaft’s (DB:BMM), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Every stock in the market is exposed to market risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few. This is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.
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An interpretation of BMM’s beta
Brüder Mannesmann’s beta of 0.75 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in BMM’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. BMM’s beta implies it may be a stock that investors with high-beta portfolios might find relevant if they wanted to reduce their exposure to market risk, especially during times of downturns.
How does BMM’s size and industry impact its risk?
With a market cap of €3.06M, BMM falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. Furthermore, the company operates in the retail distributors industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect a high beta for the small-cap BMM but a low beta for the retail distributors industry. This is an interesting conclusion, since both BMM’s size and industry indicates the stock should have a higher beta than it currently has. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is BMM’s cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine BMM’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Given a fixed to total assets ratio of over 30%, BMM seems to be a company which invests a big chunk of its capital on assets that cannot be scaled down on short-notice. As a result, this aspect of BMM indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what BMM’s actual beta value suggests, which is lower stock volatility relative to the market.