Plummeting BMW stocks trigger downfall in other automotive equities

In a surprising turn of events, BMW has announced a significant setback in its outlook for the year, due to issues with braking systems supplied by Continental. The German car manufacturer has lowered its expectations for car deliveries and free cash flow, citing the faulty braking systems as the primary reason.

Both BMW and Continental have maintained that the affected vehicles can still be driven safely. However, the issue could lead to recalls and delivery stops for an estimated 1.5 million vehicles. The pre-tax result for BMW could be worse than previously expected, and the costs of recalls, halted deliveries, and weak business in China are expected to weigh on BMW's business.

The costs for the warranty measures related to the recalls could reach a high three-digit million euro range in the third quarter. BMW's stock has already plunged by more than eight percent due to this news.

Meanwhile, Continental's stock has also fallen by seven percent due to the same issue. Other automotive giants like Daimler Truck, Volkswagen, Porsche, and Mercedes are trading significantly lower as well.

Investors in suppliers like Continental AG face a mixed outlook. Despite a significant revenue drop (51.45% in the latest quarter), Continental's earnings per share improved markedly (2.53 EUR vs. 1.52 EUR last year), and a slight dividend reduction is anticipated, indicating financial stability. However, some analysts, like Bernstein Research, rate the stock 'Underperform,' signaling cautious future prospects, while others, including Barclays, see undervaluation and growth potential especially related to a planned spin-off of the subsidiary Aumovio.

BMW is reviewing compensation claims against Continental. Berenberg has reaffirmed its "Hold" rating for BMW with a price target of 90 euros. Despite the challenges, BMW now expects a pre-tax profit margin between six and seven percent, down from the previously expected eight to ten percent.

As BMW navigates through this difficult period, it remains to be seen how the company will address the issues with Continental and what impact this will have on its long-term prospects.