BMW flags three years of uncertainty

The car maker is on a downhill roll with rivals set to follow

The car maker is on a downhill roll with rivals set to follow

The maker of X5 SUVs and the top-selling 1-series had only just revealed an almost 8% profit drop last week as it struggles with a tide of tariffs and Brexit. Now, it’s warned of a significant drop in 2019 profit that’s worse than already deeply negative expectations.

Shares in the €162bn group slumped about 17% last year and have barely recouped over the last few months. But their 5% drop on Wednesday shows investors may not have completely priced remaining downside from tariffs, and supply chain disruption from the U.S.-China dispute and Brexit. The group has more visibility into R&D-related investment costs for electric cars. It forecasts operating margin shrinkage could amount to as much as 1.2 percentage points this year compared to 7.2% last year, a negative surprise amid expectations of boost from the new 3 series and a top-end X7 SUV.

BMW also projected €12bn in efficiency savings by 2022 on Wednesday, tacitly flagging a weaker bias for profits and margins over the next three years. That points to a continued lack of traction for the stock in the medium term.

A saving grace for BMW stock though, may be that it has performed largely in the middle of a wide range of declines among European rivals. As well, despite deteriorating profitability, the Bavarian firm’s margins are contracting from a higher level than peers. BMW’s operating margin notched 9.4% last year vs. 6.1% at Daimler. So, whilst the group is first among large peers to map out pessimistic expectations for 2019, it is unlikely to be last. Assuming the outlook for European competitors has been dented at least as hard, further weakness for BMW shares this year could be contained.

Normalised chart – European automobile manufacturers – one year [20/03/2019 14:56:13]

Source: Refinitiv/City Index

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