- Trading at 30% discount to its long-term rating (17% discount to SXAP). Bullish RSI divergence forming
- Tarriff fears may be overblown as its largest manufacturing facility is situated in the US
- Potential for renewed optimism on the sector on the back of China’s fiscal stimulus and a new German government
In tandem with ongoing weakness in the Auto sector since the start of the year (SXAP -13.4% vs. SXXP +6.6%) BMW has seen a further c.6.6% sell-off after Trump’s triumph in the US (Fig. 2), mainly due to expectations about US Tariffs on European imports and apparent cashflow pressures identified in its latest 3Q24 results related to a provision of c.EUR1bn on an integrated braking system fault affecting c.1.5mn cars and ongoing weakness in China. As a result, the company cut its FY24 EBIT margin outlook to 6-7% from the previously guided 8-10%, with analysts also cutting earnings estimates for FY24 and FY25 by 13% and 18% respectively (Fig.7).
Regarding tariffs, we believe the hit may be overdone, given BMW’s largest manufacturing facility in the world is located in the US, where the most in-demand BMW X series brand is produced. Sales in North America amount to roughly a quarter of group sales (Fig.4), of which more than 60% is produced locally (Fig.5), with further capacity to increase local output to counter prohibitive tariffs on imports. BMW also set up production in China after acquiring full control of its local manufacturing venture, relieving pressure on its US production plant. On the bright side, despite the weakening levels of auto demand in general, its BEV sales continued to accelerate, seeing a 10% YoY increase in 3Q24 (Fig, 6) with its market share reaching 19.1% in the quarter (vs. 15.1% in 3Q23).
In terms of demand in China, the country’s legislative body has announced the much-awaited fiscal stimulus of c.10trn yuan (US$1.4trn) together with the extension of the Fed’s monetary easing. Although the stimulus may not have an immediate direct impact on what is perceived as a quasi-luxury auto market for BMW, it could nonetheless alleviate the already depressed sentiment on the sector. In addition, the recent collapse of the German government and the possibility of snap elections in March, six months ahead of schedule sparked hopes (as evidenced in the c2% rise in the DAX) that the prospect of a new government would lead to a change in Germany’s fiscal policy to support the weakening domestic economy and the distressed Auto sector.
Valuation-wise, BMW is currently trading at 30% discount to its long-term PE, the deepest among its German Auto peers and a 17% discount to the SXAP (Fig.3), currently at long-term support levels and with a bullish RSI divergence. Given the depressed valuation, and potential upcoming catalysts that could revive optimism on the sector, we propose June25 76 calls finance by June25 60 puts at net debit of 0.6% of underlying (Spot ref: 68.1, Fut. ref:66.1). Should the spot price increase by 10%, the value of the call leg would return c.2.5x on premium employed, all other parameters remaining equal. Alternatively, you are left holding the stock at 4.6x PE and at an implied 39% discount to its long-term rating.