Shares of BMW rose on Wednesday following a report from Citi Research that suggested the recent selloff had been overdone.
At 8:47 am (1247 GMT), BMW was trading 2.2% up at €74.490.
Citi analysts, previously bearish on the stock, upgraded BMW to "neutral" from "sell," citing the company's currently low valuation and a recalibration of risk.
The automaker's shares had been hit hard after a surprise profit warning in September, which sent shockwaves through the market.
BMW revised its financial outlook downward, warning of softer demand, particularly in China, and weakening conditions in Europe.
This led to a steep decline in the stock, pulling BMW and the broader automotive sector down to near 5-year lows.
Yet Citi now believes that these concerns, while valid, have been fully priced into the stock, making its depressed valuation less justified.
Central to Citi’s shift in stance is BMW's current market capitalization, which is now trading close to the company's net financial assets (cash). The stock, priced at €72.92 as of September 17, 2024, has nearly reached the target price of €74 that Citi has maintained throughout this period.
While the automaker continues to face multiple headwinds, including weakening margins and challenges in China, Citi analysts argue that the company’s valuation has dropped to a level where further downside risk is limited.
The September profit warning brought attention to BMW's guidance for its FY24 automotive EBIT margin, which now stands at 6.5%. This figure is below BMW's 10-year average margin of 7.9% and far from the 12.4% peak margin reported in 2021.
The days of extraordinary pandemic-era pricing, which saw average selling prices (ASPs) jump by more than 30%, are fading as market conditions normalize. This pricing power helped BMW over-earn in recent years, but now, with demand softening, margins are under strain. Despite these pressures, Citi analysts view the current 6.5% margin as sustainable in the near term, rather than a signal of deep recessionary conditions.
China remains a crucial market for BMW, and it’s also one of the company’s greatest vulnerabilities. Intense competition from local automakers and weaker demand for luxury vehicles have eroded BMW's market share and further pressured its EBIT margins.
Geopolitical tensions and economic uncertainty in China compound these issues, raising concerns about future profitability. Additionally, upcoming EU tariffs in November 2024 could create further obstacles for BMW in what is already a challenging environment.
Meanwhile, in Europe, demand appears to be slowing. The pent-up demand that sustained sales throughout 2023 and the first half of 2024 is now tapering off, while stricter CO2 emissions regulations set to take effect in 2024 will impose new compliance costs.
These factors, combined with lingering uncertainty around the profitability of battery electric vehicles, have raised concerns about long-term profitability for BMW and other European automakers.
In response to these challenges, Citi has cut its earnings and dividend estimates for BMW. The automaker's diluted earnings per share (EPS) are projected to fall to €13.39 in 2024 from €17.68 in 2023.
Similarly, dividend payments are expected to shrink, though they remain attractive with a forecast yield of 6.3% for 2024, down from 8.2% in the prior year.
Despite these cuts, BMW's current valuation suggests that much of this downside has already been factored into the share price, as per Citi.
One of the reasons for Citi's upgrade is the relatively low price-to-earnings (PE) ratio BMW is now trading at—about six times forward earnings.
The company’s market cap has fallen to a level where it is almost equivalent to the net value of its financial assets, even excluding its substantial equity stake in its financial services arm.
While challenges persist, Citi's outlook suggests that the worst may now be behind BMW. The analysts reaffirm their target price of €74, implying a modest upside from current levels. Still, risks remain.
Further price competition, particularly in China, could erode margins further, while Western demand may continue to soften.
Citi also warns of potential margin dilution from increased BEV sales, which remain less profitable than traditional internal combustion engine vehicles.
Reflecting these risks, Citi has reduced its bull-case valuation for BMW’s stock from €110 to €100 per share.