Key insights
- The article highlights the inherent risks of investing in cyclical businesses like auto manufacturers, using BMW as a case study. Despite attractive PEs during boom times, high watermark earnings are vulnerable to shocks. BMW's sharp earnings decline from €27 to an expected €8 per share, with further negative guidance, illustrates this risk. This serves as a cautionary tale for investors, suggesting that even seemingly cheap cyclical stocks can become expensive as earnings collapse, potentially impacting broader market sentiment towards cyclical sectors.
Cyclical industry investing is challenging. When business is booming, earnings soar, making valuations look very attractive. However, these high watermark earnings levels are susceptible to rapid decline from any macroeconomic or competitive supply shocks. The auto manufactures have always been susceptible to reality. Making cars is not a very good business to begin with and so much of the sales cycle is now tied to financing that the cyclical sensitivities have increased.
BMW earned €27 per share in 2022. The stock price was €70-80 euros. The shares soared on EV hopes and then reversed dramatically as earnings have collapsed to €8. Earnings guidance this week looks even worse than that now as net income margins are expected to be 0-1%. When those earnings finally print, the shares will look expensive even at €30 or €40.
That will probably be the time to consider buying. We shall see.