HSBC downgrades BMW to “hold” amid tariff pressures and margin concerns

Investing.com -- BMW’s (ETR:BMWG) financial outlook has taken a hit as HSBC Global Research has downgraded the automaker’s stock to a ‘hold’ from a ‘buy’ rating, in a note dated Thursday. 

Shares of the luxury vehicles and motorcycles manufacturer were down 3.6% 09:05 ET (13:05 GMT).

The downgrade comes as the Munich-based carmaker struggles with tariffs and supplier compensation costs, erasing potential profit recovery that was expected following last year’s recall.

The key concern outlined in HSBC’s report is the impact of tariffs on BMW’s bottom line. 

The company appears more exposed than its German peers, with a significant portion of its production linked to Mexico, where compliance with the United States-Mexico-Canada Agreement (USMCA) requirements remains an issue. 

This exposure makes BMW vulnerable to additional tariffs, a problem that competitors like Mercedes-Benz (OTC:MBGAF) and Volkswagen (ETR:VOWG_p) are less affected by due to different production strategies.

Financially, HSBC has cut BMW’s operating profit estimates by 13-14% for the coming years, citing pressures from tariffs and supplier costs. 

The price target has been revised down to €80 from €93, reflecting a 5.5% downside from the current share price of €82.78 as of March 19. 

Auto margins are expected to remain under pressure, hovering around 5-6%, well below the strategic target of 8-10%.

Production and sales data also paint a concerning picture. BMW’s production in Q4 2024 was significantly lower than sales, a gap much wider than usual. 

Although this could have been an opportunity for margin recovery in 2025, the impact of tariffs has largely negated this possibility. 

The company is the only major European automaker to explicitly account for the tariff burden in its guidance, estimating a €1 billion hit or a 100-basis-point reduction in auto margins.

Cost management has been another point of scrutiny. While many competitors are aggressively cutting costs and restructuring to improve profitability, BMW appears to be taking a less urgent approach. 

HSBC noted a lack of clear cost-cutting measures and suggested that without significant action, auto margins are likely to remain weak in the coming years.

Cash returns to shareholders also lag behind peers. Unlike Mercedes-Benz, which has announced specific buyback plans, BMW has not provided a clear roadmap for future share repurchases. 

HSBC pointed out that while dividend yields remain solid at 5.2% for 2024, there is uncertainty regarding additional capital returns.

Despite the downgrade, BMW’s financial position remains stable. The company reported €142.38 billion in revenue for 2024, with an expected slight increase in 2025 to €142.98 billion. 

However, EBITDA is projected to decline from €20.16 billion to €19.06 billion, reflecting the ongoing cost pressures.