- 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:
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.
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:
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.
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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.
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