BMW: Risks Increased

Summary

• BMW's stock price has performed in-line with major indices, while risks have increased.
• Headwinds for investors range from company-specific to macroeconomic.
• This article discusses the items facing BMW investors in 2018.

BMW (OTCPK:BMWYY) has performed in-line with major indices in the last year:

BMWYY data by YCharts

The company's fundamental outlook, however, has deteriorated. In Code Blue: 7 Series Collapses, I illustrated that the U.S. sales of the automaker's flagship product were near their lowest in 25 years. I had identified the success of Tesla's (TSLA) Model S as a primary reason behind the deteriorating sales.

If Tesla introduces a redesign of its Model S in the coming months, as I discussed in that article, then I would expect further sharp gains in market share for Tesla's luxury sedan, at the expense of its competitors who are already losing ground to a six-year-old design.

Will The BMW 3 Series "Go To Zero?"

Social Capital founder Chamath Palihapitiya said in September that the Model 3 will outpace the comparable BMW 3 Series, saying, "that entire business is going to go to zero," and added:

There is not a single person of right, sound mind and body, if you could build a Tesla Model 3 online and get it delivered in 30, 60, 90 days, or you have the choice of buying the BMW 3 Series will choose the BMW.

As Palihapitiya also pointed out, the pre-orders of the Model 3 are already hitting 3 Series orders. In fact, the BMW 3 Series sales in the United States have dropped by more than 40% from 2014 to 2017:

This is before the Model 3 is in volume production. I expect this trend to continue as Tesla exponentially ramps the Model 3 production throughout 2018 and 2019. It is possible that Model 3 production will have ramped high enough by early 2019 that a potential buyer will be able to get it delivered in "30, 60, 90 days," at which point BMW's 3 Series sales will struggle further.

Other Risks

What I described above is not the only headwind facing investors.

Just this morning, Reuters reported that "investors sold shares in BMW and Daimler (OTCPK:DDAIF) on Monday after President Donald Trump said the U.S. may tax imports of European cars if the EU retaliates against his plan to impose tariffs on aluminium and steel."

Although in yesterday's article I agreed with the U.S. Commerce Secretary Mr. Willbur Ross that aluminum and steel tariffs are "no big deal," a tax on imports of European cars could significantly impact the European automakers, because as Reuters also points out, the U.S. sales accounts for a big chunk of their global profits. This is a major risk for BMW investors.

Furthermore, the 2-year and 5-year interest rates have substantially increased throughout the last six months:

Surging interest rates may increase default rates on existing leases, while also reducing demand for new ones. Investors should keep an eye on the company's charge-offs, as I discussed in Ford Credit: Strength Or Weakness?

Finally, Brent crude oil prices have increased by 50 percent since July of last year, setting the stage for rising gasoline prices in the coming months:

Brent Crude Oil Spot Price data by YCharts

Bottom Line

Both company-specific and macroeconomic risks facing BMW investors have increased in recent months, whereas the stock has not yet reflected the higher risks. I continue to rate BMW a SELL.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[User 6547041]

BMW: Expect Strong Profit in 2018 Despite Big Future-Tech Spending - The Motley Foolhttps://apple.news...

Next thesis VA? Think you are missing the mark on this one.

[janeasy]

When comparing BMW and TSLA it all comes down to one simple question for me: What is the more likely scenario ?

A) a new company who proved to have great ideas but failed in all ways of manufacturing can suddenly produce enough cars in time, in good quality and in a financial efficient way

or

B) a company who is efficiently producing several types of engines, vehicles etc. all over the world in time and managed to develop new products more than 100 times can now develop a EV which their broad costumer base are willing to buy ?

To be honest .... I would take the second bet

[Javaman]

Value Analyst seems to be not so good at analyzing. BMW builds cars several places in this country, notably South Carolina, where they have recently committed to more production. And the chart of BMW declines shows declines long before the Model 3 was even conceived. And the price point of the Model 3 is averaging $50,000 ,which does NOT make it competitor of the Model 3. For some strange reason, thisanalyst sems totaly unaware of the broad electrification ofBMW - every single car model they make can be configuredas electric (or hybrid or gas powered) right on the assembly line, which makes their assembly process far more efficient than Tesla's "One type of one model" at a time (with poor quality). BMW will have 12 electric models in all, and we can rest assured that they will match up quite well,, orexceed, the performance of any Tesla vehicle. Tesla's "advanced performance technology" consists of stuffing a bigger motor and bigger battery in their cars, and not providing enough cooling to allow for extended high performance that damages the components. And I'm sure BMW will accept Porsche's offer of ultra fast recharging CCS software and be able, like Porsche, to recharge its batteries twice as fats as any Tesla, and have a wealth of charging stations throughout the world to support the universal CCS charging protocol. "Tesla advanced technology"? It is a myth - it doesn't exist - their autonomous driving technology is the worst - generations behind GM and others. And they are losing their $7500 govt tax credit, which will provide BMW and all others to enjoy a $7500 price advantage. Nor will Tesla "exponentially" increase their Model 3 production rate, not that it would make any difference if they did - their waiting list has stagnated for months.

[Jaberwock Research]

why would the world's largest manufacturer of electric vehicles, outside of China, be concerned about the possible shift towards electric cars?
And why would a company that makes cars in Alabama be affected by a tax on imports to the US?

I fail to see the point of your article

[irish_bob]

great company
great cars

awful stock

the stock has seriously lagged the DAX this past five years

[jack2012]

Great cars for the first three years. A local dealer does not keep trade-ins older than 3 years. They wholesale them to car lots who sell them to buyers who think they can afford them.

[TreyT]

??? My mother in law has a now 19 year old BMW Z3, had a couple of minor issues and the top needs to be replaced but on the whole? Pretty solid car...another friend of mine put 185k on his E46 325i. He had to replace the radiator and water pump, (water pump twice actually) but it was generally reliable. Friend of mine has a 2009 335i with 185,000 miles on it, other than the HPFP issue and an oil drip it's been solid and the car still drives tight and is quiet inside.

[jack2012]

Both vehicles are10 years and older before the electronics went nuts. There is an E36 in the family that only has had a rad and H2O pump as well. They now are complex because they can be as well as the keep-up-with-the-other... mentality.

[OldEurope]

You do trick yourself by isolating 7Series, BMW Self cannibalised sales with models and variants catered to customers preference.
In my mind you should lump in 6Series and a certain percentage of X5/X6... Teslas lack of portfolio does not justify to omit competitor‘s offerings in the market bracket in your analysis.

[sam026]

And yet another VA article telling us that the whole auto industry is failing, well except for that one bright and shining star with few sales, NO profit, NO FCF and a 20% reduction in stock value in the last 8 months or so. You know the one that pays its employees with its stock holders equity.

[Poborsky]

Like all volume car manufacturers, the last company on their mind is Tesla. EV cars are a niche market and never will be a large volume sales area, and the big auto makers know this. Apart from that I have owned BMW´s and they have always been reliable and well built. Some of my friends always exchange their older models for a newer one, because of reliability, not only of the car itself, but the reliability and quality of service at the dealership.

[edoorfly]

Would not TSLA lose more if a trade war broke out.

[TreyT]

All the while, ignoring BMWs record sales and excellent Jan and Feb? what a bizarre article...BMW sales data overall has been outstanding. The mix has migrated to the SUVs, the same as it has for nearly every car manufacturer.

To assert 3 series will go to zero because of model 3 is laughable. I don't want misaligned body panels or crappy interior quality, or inability to use the car while in motion because the ergonomics of the infostack are terrible (but cool looking).

[Bill Cunningham]

"I had identified the success of Tesla's (TSLA) Model S as a primary reason behind the deteriorating sales."

Well, that's incorrect.. The main reason is the shift to SUV's/CUV's.

http://reut.rs/2CZkvED

[ValueAnalyst]

Because of the success of Tesla's Model S, traditional automakers are increasingly focusing their efforts in cross-overs, which is an increasingly crowded market.

Enter; Stage Right: Model Y

[Bill Cunningham]

"Because of the success of Tesla's Model S, traditional automakers are increasingly focusing their efforts in cross-overs"

VA-No, traditional automakers are focusing their efforts on crossovers because that's what consumers want. Tesla missed the boat and produced sedans instead. It's a contributing factor to Tesla's likely losses of $500 million to $1 billion this quarter.

[ValueAnalyst]

Mhmm.. Do you know of any crossovers with a 500,000+ strong waiting list?

Let's see what higher oil prices soon do to your "that's what consumers want theory." ;)

[AutoTech]

BMW (I'm not a fan) is already selling 1000 more EVs (across its models) monthly in Europe than all TSLA models combined.

BMW Stock is a SELL.

TSLA is a SHORT

[ValueAnalyst]

I think you mean "electrified," which is different than "all-electric."

[User 7369811]

@ValueAnalyst, where is the BMW 4-series in your analysis? A couple of years ago, BMW began offering the 4-series grand coupe which sells for nearly the same prices as the 3-series. That has split what were traditionally 3-series sales into 3/4 series sales. The 2017 numbers are indeed still down from 2016 even if you sum them, however, that is easily explained by the large increase in X1 and X3 sales.

I agree that Tesla is offering a distinctive product in this segment and it absolutely will appeal to buyers who prefer tech over luxury. The 3-series is all new for 2019 and my guess is that the interior is ergonomically superior and more luxurious than the Model 3. Of course, execution is everything and Tesla must deliver on quality as buyers (especially in this price range) do still care a great deal about panel alignment, squeaks and rattles, etc.

[djc301]

VA keep up the good work! You put together well thought out open minded suggestions articles that often shock people. People get shocked when they are told the future, has been happening since the dawn of time

[ValueAnalyst]

Exactly. Investors in any company don't want their stock called ugly. This is not new.

[LexOFF]

Poor analysis, very narrow minded. Please go deeper in your analysis and then you will figure out the truth behind the numbers.

Please refer to the recent article on SA called "BMW posts strong month in U.S.".

Besides that: tesla's vehicles are just plain ugly.

[ValueAnalyst]

"ugly" must be the reason why half of a million people are in line.

[OldEurope]

How many weeks did it take BMW to sell half a million cars?
Did they earn any profit doing so?

[L'Aguilón Investments]

agree

[syndrome]

Why do you point out these risks for BMW, but ignore the same risks that are VASTLY more significant to Tesla?

[belz]

Syndrome,

I think it is because BMW is NOT growing revenues at over 50% CAGR like Tesla is, now 6 years running.
And this growth will exceed 100% for Tesla.
Maybe that is why?

[ValueAnalyst]

Thank you belz.

[portatopia]

"I think it is because BMW is NOT growing revenues at over 50% CAGR like Tesla is, now 6 years running"

Also BMW is NOT growing LOSS at over 70% YOY lik TSLA.

[TheDoktor]

The 7 series BMW is not now, now was it ever, BMWs “flagship product”.

[ValueAnalyst]

"The 7 Series is BMW's flagship car"

http://bit.ly/2D20CN3

[TheDoktor]

According to Wikipedia. Hmm.

[Oczssd]

What is BMWs flagship product then?

[hummingbirdass]

We ain't seen nothing yet, in just three years cells will reach $100-110 per kWh. When that tipping point is reached, the world as we know it today will no longer be the same.

p.s. but now I wonder if there is a "cobalt cliff" that will prevent electric cars from growing big beyond 2025.

[ValueAnalyst]

There are technologies in development that reduce the need for cobalt. 2025 is an eternity away.

[hummingbirdass]

Progress is slow. From what I can gather getting 811 to work in the real world (EV volume production) will take longer than people expect. In the battery world press releases are easy to do, but reality is often different. They will not be able to get rid of cobalt is my assumption till proven otherwise.

[ValueAnalyst]

I agree that solid state battery progress is slower than originally thought, especially by traditional automakers, but 2025 is 7-8 years away...