EUR 850.00 For Business Accounts Only

Morningstar | BMW 1Q Results Hit a Rough Patch but Confirms 2019 Guidance; Maintain EUR 118 FVE

Narrow-moat-rated BMW reported first-quarter diluted earnings per share of EUR 0.85, which includes a EUR 1.4 billion noncash provision recognized for the European Commission's antitrust investigation on diesel equipment. Excluding the provision, we calculate diluted earnings per share before special items of EUR 2.39. Including the provision, EUR 0.85 EPS represented a whooping EUR 0.35 miss compared with the sell-side consensus of EUR 1.20 and EUR 2.59 per share lower than a year ago. We think the primary reason for the substantial miss compared with market expectations was the amount of the EC provision actually taken versus management's April announcement, which only said that the provision would likely "exceed EUR 1 billion."

Group revenue slipped by 0.9% compared with the prior year to EUR 22.5 billion on automotive unit volume that was nearly flat, up just 0.1% versus the first quarter of 2018. Headwinds—including unfavorable pricing in certain markets, higher research and development spending to launch new models, and increased investment in electrification and autonomous technologies—resulted in a 78.2% plunge in group EBIT to EUR 589 million from EUR 2.7 billion reported in the prior year. Excluding the EC provision, we calculate group EBIT margin of 8.9% representing 300 basis points of contraction from 11.9% a year ago.

Management confirmed guidance that had previously been reduced in April to reflect the EC provision. Automotive segment deliveries are forecast at a "slight increase" but EBIT margin guidance "between 4.5% and 6.5%" due to the EUR 1.4 billion EC provision, higher spending for electrification and autonomous technologies, plus hefty development costs on models being launched. Management maintains its 8% to 10% long-term automotive EBIT margin target. In our view, BMW shares are attractively valued, currently trading at a 38% discount to our EUR 118 fair value estimate.

In March, new BMW 3 Series, Z4, 8 Series, and X7 were all in launch mode. The BMW X5, which launched in November 2018, is still ramping up certain engine variants. Due out later this year are the new BMW X6, the all-electric Mini, and plug-in hybrid variants of the 3 series and the X5.

During the past 10 years, BMW's industrial EBIT margin, excluding equity joint venture income, has had a high, low, and median of 11.6%, negative 0.6%, and 9.0%, respectively. We assume a 7.6% normalized sustainable midcycle group EBIT margin, 40 basis points below management's long-term 8%-10% guidance and 140 basis points below the 10-year median. For our model to generate a EUR 80 fair value, equivalent to the sell-side consensus price target, investors would have to believe that BMW's normalized sustainable midcycle EBIT margin would be 3.0%. At the current market valuation of EUR 73, our normalized sustainable midcycle assumption would have to be 2.1% for our model to generate an equivalent fair value. In our view, the market has unfairly valued BMW as though fundamentals will only deteriorate from the current transitory margin contraction.