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Losing its lustre
Few sectors enjoy greater attention than the automotive industry. That is particularly true in Germany, home to global marques such as BMW, Mercedes, Volkswagen and Audi. The sector can look back on decades of success stretching as far back as the postwar period, when the type 1 Volkswagen, the VW Beetle, first rolled off the production lines in 1945. The car quickly became the most important of status symbols and an accelerator of economic growth. Today the motor sector is still the most significant branch of the economy in Germany by far – not only the largest segment of the manufacturing industry, but also one of its biggest employers. Nevertheless, that reputation is now at risk: a series of deeply concerning reports of profit warnings, job losses and factory closures, among others, have been doing the rounds just recently.
Lots of roadworks
VW set the ball rolling at the start of the month. With the figures for the first half, which had already come with a lower forecast for the year as a whole, revealing serious weaknesses at Europe’s large motor group, the latest statements from its management suggest the problems have become even weightier. At a works meeting, CFO Arno Antlitz shocked those in attendance by disclosing a current shortfall in sales of about 500,000 vehicles, corresponding to the output of roughly two plants. “The market simply isn’t there any more,” Antlitz said. The finance director is looking to counteract this with a tougher austerity policy, which could also entail job losses and factory closures. VW seems to be finding savings just as difficult, though: according to media reports, the “fitness programme” launched in 2023 with the aim of delivering some EURbn 10 in cost savings is still up to EURbn 5 short of the target. As a result, a dispute between the works council and management about job losses, similar to the last one in 2016 following the diesel emissions scandal, seems almost inevitable.
Pressure on margins
While weak demand, high costs and investment are threatening to put VW into the red in 2024, results are also putting premium manufacturers BMW and Mercedes-Benz under pressure. The Munich carmakers saw their pre-tax profits fall by 10.7% in the second quarter, with the key profit margin in its motor business accordingly tumbling almost one percentage point to 8.4%. The downward trend will accelerate further in the second half of the year. A few days ago, the “white and blue” marque shocked observers by issuing a profit warning. Following problems with a brake system from its supplier Continental – the additional costs are put in the high three-digit million range – and a continuing slump in the Chinese market, BMW is now expecting a decline in sales this year and a return from its motor business of just 6% to 7%. The board had previously held out the prospect of 8% to 10%.
Hope for improvement
With a profit margin of 10.2%, Mercedes-Benz may have put its competitors in the shade in the spring quarter, but it is likewise on a downward trajectory: the brand with the star had achieved a return of 13.5% the year before. However, bosses have now dismissed the possibility of reaching such heights in 2024. At the halfway point the Stuttgart company narrowed its expectations for the year as a whole from 10% to 12% down to 10% to 11%. The group expects the operating result to be “slightly” below that of the previous year, which by Mercedes’ definition corresponds to a drop of 5% to 15%. Recently the carmaker has been having to deal not only with weaker Chinese business, but also the fact that fewer models from the luxury segment, which are generally much more profitable, are being sold at the moment. Their share of total sales fell by two percentage points to 14% in the second quarter. Group CEOr Ola Källenius expects to see an upturn here, however: “Sales and the model mix are expected to improve in the second half of the year, supported by further market launches of new models, particularly in the top-end segment.” The petrol version of the pepped-up V-class and a hybridised variant of the Mercedes-AMG GLE 53 will be launched on the market, for instance.
Graph: Revenue of the automotive sector
Source: BMW, Mercedes-Benz, VW
German car trio:
Buffered ride with bonus certificates
Sales dip
That Germany’s key industry has been on a bumpy path for some considerable time already is clear from the capital markets. The shares of BMW, Mercedes-Benz and VW have suffered double-digit percentage losses over the last year, a much worse performance than that of the DAX, which advanced by almost a fifth over the same period. The downward trend is being accompanied by sluggish sales and declining profitability. Looking at the German market as a whole, there is no improvement in sight: it shrank by 27.8% in August compared with the same month the previous year. New registrations of electric cars have fallen at an even faster rate, with 68.8% fewer customers opting for the eco-friendly option across all makes in that summer month. Industry association the VDA has already revised down its sales target for 2024 and expects a 17% drop in new registrations. The picture on the important Chinese market is currently rather cloudy: while the graph for combustion vehicles is also heading downwards, sales of electric cars – boosted by subsidies – are rising strongly. In August sales of vehicles with alternative drive technology (known as new energy vehicles, or NEVs) climbed 43.2%, accounting for a record 53.5% share of total sales. This did not change the fact, though, that the market as a whole declined for the fifth month in a row. Given the ongoing tailwinds provided by government incentives, however, experts believe that sales will finish 2024 in positive territory. S&P Global, too, believes that more vehicles will be delivered worldwide. The analysts anticipate growth of 1% to 3% this year and reckon that 2025 will see the global car market accelerate slightly to 2% to 4%.
Thumbs up
A recovery in the market would also play into the hands of the German trio, assuming the groups get a grip on their home-grown problems. However, the valuations of the companies are now at such a low level that the bulk of the bad news may have already been priced in gradually. The BMW and Mercedes-Benz shares are currently trading at a 2026 PER of just 4, while the figure for VW is just 2.5. It is not surprising, therefore, that the consensus among analysts is to see upside potential despite the atmosphere of crisis. While there could, admittedly, still be downward revisions as a result of recent events, the current average price targets are so high that individual downgrades should not carry too much weight. BMW shares currently enjoy a “hold” rating and have an average price target of EUR 90, a premium of around one fifth on the price now. The majority still rate Mercedes-Benz and VW as “buy”, each at a fair value of 40% above the current price level.
Enjoying the ride with no speed limit
Should the three car shares be able to get out of crisis mode again, their recent considerable underperformance could make a strong U-turn a distinct possibility. It is, of course, extremely difficult to get the timing of this exactly right. What is more, the pessimistic underlying mood mean that further setbacks cannot be excluded. Bonus certificates are the perfect investment solution for this situation, which is why Leonteq has launched two new instruments denominated in CHF and EUR on BMW, Mercedes-Benz and VW. On the upside, the products offer full participation in price rises of the equally weighted basket of shares. On the downside, the structure has a comfortable safety buffer. Investors thus participate 100% in increases in the trio’s share price – and without any limit, because there is no cap. That allows the full price potential of the car securities to be utilised. For the case that one of the three underlyings heads south, the barrier comes into play. It is a comfortable 45% from the starting prices. Should the shares end the three-year term in negative territory, then, but the barrier remain intact, holders of the certificate need not fear any losses. By contrast, at least the bonus level of 130% in the CHF variant and 139% in the EUR variant will be paid out.
Risk of a barrier breach
If the downward movement of at least one stock gets too fast, however, so that it touches or breaks through the barrier level, the attractive bonus mechanism switches off. The weakest of the trio on final fixing will then prevail, and its performance will determine the repayment. To give an example, if the worst performer falls 5%, the repayment will be reduced to CHF 950 or EUR 950 respectively. This would equate to a loss of 5% on the nominal. Assuming that the securities recover after breaching the barrier, however, so that the weakest member finishes 5% in positive territory, the repayment would be 105%, or CHF 1,050 and EUR1,050 respectively. This example shows that a possible breach of the barrier need not necessarily result in a loss.
Chart: BMW vs. Mercedes-Benz vs. VW (3 years)
Multi Bonus Certificate
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