BMW share price: Rolls-Royce parent forms a dangerous pattern

The BMW share price has suffered a harsh reversal as the automobile industry goes through a difficult phase. It dropped for three consecutive weeks, reaching its lowest level since January 2023. It has retreated by over 32% from its highest point this year, meaning that it is in a deep bear market.

New normal for the auto industry

The automobile industry is going through a new normal as the electric vehicle growth slows and as China becomes a leading player.

A decade ago, China was a relatively small player in the vehicle manufacturing industry. Today, companies like BYD, which Warren Buffett backs, have become giants. China has even overtaken Japan as the biggest exporter of vehicles.

Most importantly, companies that have long dominated the Internal Combustion Engine (ICE) industry are having a difficult time competing with the new EV firms like Tesla, BYD, and Rivian.

In the United States, Ford and General Motors have been forced to cut their EV manufacturing ambitions significantly. The same is happening in Germany, where EV brands by BMW, Volkswagen, and Mercedes have not become highly popular.

This explains why most automobile stocks like Stellantis, Ford, General Motors, and Volkswagen have all tumbled in the past few months.

BMW is facing significant challenges

BMW, the parent company of Mini and Rolls-Royce, is facing significant challenges as growth in its key markets like China and Europe continues slowing down. 

These challenges have also pushed Volkswagen, another giant German company, to announce plans to shut down factories in Germany for the first time in decades. 

The most recent financial results showed that the company’s business was slowing. Its total revenue dropped by 0.7% in the second quarter to over €32.9 billion. In the first half of the year, revenues fell by 0.7% to over €73.5 billion.

Most of this slowdown was because of eliminations, which cost it over 5.8 billion. Instead, its automotive division‘s revenue rose by 1.4% to €32 billion while its financial services jumped by 10.8% to €9.7 billion. 

These results mean that BMW is doing relatively better than Volkswagen, which we covered before here. Unlike VW, which has numerous brands, BMW focuses on three brands: BMW, Mini, and Rolls-Royce. It is also a leading player in the motorcycle industry. 

While BMW’s sales were relatively strong, its profits were not, as the company continued to see elevated costs. As a result, its group profit dropped by 10.7% in the second quarter to €3.8 billion and to €7.93 billion in the year's first half. It also slashed its guidance, which explains why the stock has tumbled.

Its flagship BMW deliveries rose by 2.2% to 565,490 while its Mini and Rolls-Royce units fell by 27% and 16%, respectively.

Catalysts and challenges

BMW is one of the best-known brands in the automobile industry with a presence around the world. 

The biggest catalyst for its brand is that it has a legacy of creating quality ICE vehicles, which will continue offsetting its losses in the EV industry. Like with most analysts, I believe that BMW should focus on being a leader in the ICE sector, instead of pouring substantial sums of money on the EV business.

Another option is where the company used its strong balance sheet to acquire some of the currently undervalued Chinese EV manufacturers. Potential acquisitions would be firms like Nio and Li Auto, which have valuations of $11.5 billion and $20 billion.

Such an acquisition would let the company continue to leverage its scale in the ICE industry while still having an edge in the EV sector. 

The other catalyst for BMW is that it is significantly cheaper compared to its peers. It trades at a 3.9x free cash flow and 2.16 forward earnings. It also has a price-to-book ratio of 0.52. 

BMW is fairly undervalued because investors anticipate weak demand in the coming years as the industry goes through a rough patch.

On the positive side, BMW is a great dividend payer with a yield of 8.01%, higher than companies like General Motors and Ford.

BMW share price analysis

The weekly chart shows that the BMW stock price formed a double-top chart pattern around the €106 level. In most cases, this is one of the most popular bearish signs in the market.

The stock has also dropped below the neckline at €81.65, its lowest swing in October last year. It has flipped below the 50-week and 200-week moving averages and the 38.2% Fibonacci Retracement level. 

The Relative Strength Index (RSI) and the MACD indicators have continued falling. Therefore, the path of the least resistance for the BMW share price is downwards, with the next point to watch being at the 61.8% retracement point at €58.32.