EUR 850.00 For Business Accounts Only

Morningstar | BMW Posts Mixed 3Q Results, Confirms Guidance; Maintain EUR 117 FVE

Narrow-moat-rated BMW reported third-quarter earnings per share before special items of EUR 2.12; this missed the sell-side consensus of EUR 2.31 by EUR 0.19 and was EUR 0.64 lower than a year ago. Group revenue improved by 5% compared with the prior year to EUR 24.7 billion on automotive unit volume that was nearly flat, up just 0.3% versus the third quarter of 2017. We estimate that excluding favorable euro/dollar currency exchange rates, revenue would have grown 4%. Headwinds including new, more costly European emission certification procedures, higher research and development spending, and increased investment in electrification and autonomous technologies resulted in a 410-basis-point year-over-year contraction in group EBIT margin to 4.5%.

We think BMW's stock has been unfairly discounted on concerns regarding weak demand for diesel-powered passenger vehicles in Europe, the EU diesel antitrust investigation, the U.S. demand cycle, and the impact of international trade conflicts. This 4-star-rated stock currently trades at a compelling 37% discount to our EUR 117 fair value estimate.

BMW does not provide numbers, but management confirmed guidance that had previously been reduced in September. Automotive segment revenue is forecast to be "slightly lower than the previous year" owing to negative currency effects for the full year, Europe market distortions on new emissions testing regulations, and softening China demand due to ongoing trade conflicts with the United States. EBIT margin guidance is "at least 7%" on higher spending for electrification and autonomous technologies, plus significantly higher additions to goodwill and warranty provisions.

During the past 10 years, BMW's group EBIT margin has had a high, low, and median of 11.6%, negative 0.6%, and 9.0%, respectively. We assume a 7.7% normalized sustainable midcycle group EBIT margin, 30 basis points below management's long-term 8%-10% guidance and 130 basis points below the 10-year median. For our model to generate a EUR 89 fair value, equivalent to the sell-side consensus price target, investors would have to believe that BMW's normalized sustainable midcycle EBIT margin is 5.7%. At the current market valuation of EUR 74, our normalized sustainable midcycle assumption would have to be 3.9% 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 pricing environment and increased spending on industry-disruptive technologies.