BMW's Headwinds

| About: Bayerische Motoren (BAMXF)

Summary

BMW struggles in its two most important markets - China and the U.S.

BMW's biggest competitor has caught up and is going to put more pressure on BMW's sales.

BMW has lost earnings momentum along with high R&D expenses.

Positive currency impacts contributed to BMW's success in 2015 - the risk of an appreciation of the euro is lying ahead.

Having achieved a new sales volume record for the fifth year in succession in 2015, BMW's (OTCPK:BAMXY) (OTCPK:BAMXF) first quarter gave some warning signals. Its competitor Daimler (OTCPK:DDAIF) (OTCPK:DDAIY) showed more growth along with a higher profit margin. In my view, BMW seems to lack earnings momentum.

Recent news from BMW cited a decline in U.S. sales by 13.3% YoY. Given my skeptical view on U.S. demand, this decline in sales can be expected to continue. Being a key automobile market with 18.1%, worse U.S. demand will hurt BMW.

What about China, BMW's most important market with a share of 20.6%? I believe the economic slowdown in China will continue to have a severe impact on the automobile market. The sales volume figure for China was slightly up in 2015 (+1.6%). However, compared to the competitor Daimler in the high-end auto sector, this is a disappointing number. Daimler didn't reach BMW's sales volume, but it was able to grow its sales volume in China by 31% . That can be attributed to Daimler's much younger product range. BMW has to come up with a new product line.

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BMW benefited from the positive currency impact, as the exchange rates of the U.S. dollar, the Chinese renminbi and the British pound all appreciated against the euro. Without these exchange rate factors, revenues would have been 6% less. Due to the large exposure to foreign currencies (China, the U.S. and Great Britain make up roughly 50% of BMW's automobile market), an appreciation of the euro for the year could be an imminent risk for BMW.

The company had an almost unchanged R&D ratio of 5.6% in 2015 while R&D expenditure rose by 13.2%. What will consume additional R&D resources this year, is BMW's prospective innovative car - the Vision Next 100 concept. That is an attempt to be ahead of Tesla, Google and Apple in developing an automotive car. It will be exciting to see whether such a new car will play out before the R&D expenses reach an unsustainable level.

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