Investors will be asking some serious questions this month about the performance of BMW [FRA:BMW] shares. Stock in the German car maker continues to slide in August, down 6.43% in the last 30 days and more than 15% in the last six months.
A powerful brand in the motoring sector, BMW stock is now starting to look quite cheap, with its PE under 6x. But is the stock close to the bottom, or is there risk here of losing more?
A familiar tune for auto sector investors
It’s a familiar story for investors: China seems to be the big issue, having been a major source of BMW sales over the years. Weaker Chinese demand, prompted in part by a generally weaker economy, is having a knock on effect.
BMW’s delivery growth in 2024 is expected to be limited due to the economic slowdown and inflation affecting consumer spending on premium items across the board. But Chinese car buyers have more options now, including some local brands which are making their presence felt.
“Sales in China remain tough because of intense competition from local manufacturers like Nio and Xpeng, who have faster software development cycles,” said Orwa Mohamed, an analyst with Third Bridge. “Chinese consumers lack brand loyalty and quickly switch brands for better prices and new features.”
Is it all about China?
Will Chinese car manufacturers start breaking into BMW’s core market in Europe though?
Motor industry experts told Third Bridge that Chinese competition in Europe poses little threat to BMW for the next two years. Chinese carmakers are focused on budget EVs, not the premium market where BMW excels. They also lack BMW’s strong brand loyalty and extensive dealership network in Europe.
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BMW’s decision to delay its electrification timeline, unlike competitors, has helped it navigate the slowdown in EV demand better than some competitors.
“Our experts cast doubt on the demand for EVs, as they are more expensive than ICE cars and lack government bonuses in many countries, including Germany, and residual values for EVs have suffered,” said Mohamed.
BMW headlined on its EV sales in its report to investors in May, with 83,000 vehicles delivered from its BMW, MINI and Rolls Royce brands, and BEV sales up by 28%. Like Tesla, it could be about to see some unprecedented softness in the EV market.
The company maintains a strategic EBIT target of 8-10% and stressed to investors that it’s EBIT margin of 11.4% was above its strategic target of more than 10%.
Localising battery production in key markets like China and the US is also crucial for BMW to secure raw material supply and benefit from local innovation.
BMW cash flow is major consideration for investors
UBS in its own analysis of BMW’s latest set of numbers, which hit the market last week, highlighted weak free cash flow for the quarter and questioned the guidance for a better second half, due to ongoing weaker retail sales overall, both in Europe and in Asia.
The stock is rated Underperform on the AI platform at Bridgewise, which noted that based on current performance the company is in the bottom 30% among consumer discretionary stocks. Weak performance in net change in cash and cash equivalents is weighing the shares down and historically will continue to create negative sentiment for the shares.
Investors casting around for alternatives in the German car market should proceed with caution, as many of the above issues are also reflected in BMW’s peers, including the likes of Volkswagen, Porsche and Mercedes Benz. There are no bright spots in German car manufacturing right now.
