Share of the Week

	BMW		symbol: 0H9W

European car makers are having a hard time, just like ones with operations in the UK. But some are likely to do better than others.

We think that BMW looks set to do relatively well. The company itself is cautious, and still says that it cannot give guidance on earnings for 2009, given the continuing economic and financial uncertainty. BMW is also unlikely to be a major beneficiary of European government schemes to boost new car purchases – because recession-conscious consumers tend to go for smaller, cheaper cars.

But BMW has some fundamental strengths which should prove more important in the longer term. The company will benefit from an increasing number of new models that are due to be launched from 2010 onwards. Recent investment in improving fuel economy, without hurting performance, should also help boost their appeal to a newly buoyant consumer in coming years. The 5 Series and X3 are due for renewal in 2010; the 1 and 6 Series in 2011, and the high volume 3 Series in 2012. BMW’s rationalisation programme has a 2012 target date so benefits, which are linked to new model roll outs, should start to build up over the next couple of years.

We believe that the US economy will lead the European economies out of recession. This should give BMW’s US operations – which account for 20% of cars sold – a chance to shine, after a difficult 2008 and 2009 to date. BMW’s relatively aggressive use of leasing in this market forced extensive write-downs last year. These costs shouldn’t recur this year and recent signs (for example in US second hand vehicle pricing) are encouraging.

BMW’s limited benefits from government car purchase incentives could also eventually prove to be a cloud with a silver lining. The danger for other carmakers that benefit more from the schemes is that they simply move purchases scheduled for 2010 forward to this year. So these carmakers’ sales could still dip in 2010, even if global economic recovery is by then underway.

BMW’s shares are also likely to prove volatile in coming months, being driven largely by monthly sales statistics and global macroeconomic news. But as its outlook is less distorted by incentives, the impetus given by new model launches, improving returns from a restructuring programme and, to date, a relatively robust cash performance, BMW is probably a good – if still risky – way to get exposure to recovering markets via auto makers in 2010.

 

Last updated: 29 June 2009