China in focus: With the majority of investor questions currently directed towards
BMW's Chinese business, especially given the sharp (-43%) decline in JV profits in Q1,
negative sentiment is likely to prevent the stock outperforming in the near-term.
Management also stated on last week’s Q1 call that costs are back-end loaded in
2015E, leaving H2 profits likely down on H1. This may well be traditional management
caution so consensus downgrades will likely be overplayed but in a sector so driven by
earnings momentum, we expect the shares to struggle to outperform during this
period. We therefore downgrade the shares to Equal Weight and reduce our PT to €115.
However, in the longer term we believe BMW still offers plenty of opportunity, especially
when key model momentum accelerates and also given how low sentiment has already
fallen on China earnings.
Product cycle lull: While BMW has plenty of new niche products to help smooth peaks
and troughs in its cycle, mix is likely weak near-term and until key series launches
come, we think its Stuttgart peer (Daimler: OW, PT €95) will have the edge on volume
growth. All new 7-er due to be unveiled later this year will be key as it marks the start of
new styling for the other series ranges too, but for full earnings lift from new product
we think investors must await the new 5-er in late 2016E. With product cycle a clear
drag in China, we think fears over a more complete collapse in China earnings will
weigh on the stock, although we remain confident that this is merely a near-term hiatus
until new product arrives. We also think the weaker EUR continues to benefit BMW as a
net exporter (we update our FX sensitivities in this note) and note that the peak for
technology spending has likely passed and cash should therefore build from here. But
stock outperformance is likely on hold until earnings upgrades return.
Risks to our new rating: In the longer term we still see plenty of upside opportunity as a
result of BMW's management expertise, strong cash generation, attractive yield
valuations and technological leadership, and given how low sentiment has currently
fallen. However, we expect a near-term pause in the share's outperformance until China
margins show signs of improvement. We reduce our 2016E EPS forecast by 13% and
2017E by 6% but note that consensus estimates already bake in plenty of caution on
China and leave room for clear upside on 2017E in our view.