We downgraded our stance on BMW from a Buy to a Hold and reduced our price target from €94 to €75.60. The 2018 results were disappointing but persistent headwinds in 2019 are making the valuation of the Group difficult to determine.
Management are expecting a significant decrease in Group earnings before tax (by more than 10%) due to higher costs of developing electric and self-driving cars. To help soften the hit on the P&L, the automaker also announced a €12 billion cost savings and efficiency plan (by the end of 2022) to help offset higher technology investment. However, in the near future, we find it hard for the Group to reduce costs as future cost savings come at a price today (example in the form of early retirement payments). We expect costs to remain high in 2019 and 2020.
However it is also true that BMW shares are trading on a P/E of 6.6x (below its 5-year average of 8.4x) and below the industry average of 8.7x. We have a hold recommendation on the stock (as opposed to a sell) because we believe the headwinds for 2019 are already priced in (including the 10% drop in earnings before tax during 2019). Our forecasted earnings figures are also below consensus. Any positive news from the US-China trade war and Brexit would be a start to seeing improved performance in the shares from these depressed levels.
Brexit and the US-China trade war weighted negatively on the results of the group. But they weren’t the only reason for the weak results.
BMW reported an EBIT margin of 9.3% for 2018 down from the 10% reported for 2017. The biggest reduction in margins took place in H218 when EBIT margins declined to 5.4% from 9.2% in H118. This was a result of;
• Increased costs in research and development (increased 13% over 2017)
• Negative FX movements
• Increased costs of raw materials
• Competitors having sold their inventory of non WLTP compliant vehicles at discounted levels impacting negatively sales of the Group in Q418
• EBIT margin between 6-8% (automotive) below the previous goal of 8-10%
• EBIT margin between 8-10% (motorcycles)
• Significant decrease in Group earnings before tax (by more than 10%). High cost of developing electric and self-driving cars will continue to be a burden on earnings
• The automaker also announced a €12 billion cost savings and efficiency plan to help offset higher technology investment and currency costs
Our 12-month Price target of €75.60 is factoring in a forward Price-to-earnings multiple of 8x and a discount rate of 10.6%.
About the Company
BMW AG; originally an initialism for Bayerische Motoren Werke in German, or Bavarian Motor Works in English) is a German multinational company which currently produces automobiles and motorcycles, and also produced aircraft engines until 1945.
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