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New Emission Standard Disrupts German Automakers' Sales

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The newly implemented Worldwide Harmonized Light Duty Vehicles Test Procedure (WLTP) regime, which replaced the New European Driving Cycle (NEDC) regime, has rattled the European automotive market. Per Reuters, the new WLTP test, which came into effect on Sep 1, gives higher carbon dioxide reading than the old NEDC test system. This, in turn, pushes vehicles into a higher tax bracket.

The new emission regulations, based on real driving data, could take away advantages of tax incentives enjoyed by the automakers, with ultra-low emissions in certain countries.

Under the new WLTP test system, vehicles have to go through stricter emissions tests on the road instead of just the laboratory tests of the old test system. In fact, the new WLTP test system has prompted some vehicle manufacturers to withhold models from showrooms, which are not conforming to new regulations. Moreover, some of the automakers even resorted to offering discounts on other models to keep their market share intact.

Disruption in Car Sales

The kickoff of new WLTP system resulted into disruption and halt in the production of some models. In fact, the new regulations forced major German auto manufacturers — BMW AG (BAMXF - Free Report) and Volkswagen AG as well as Daimler AG’s (DDAIF - Free Report) Mercedes-Benz to halt the sale of some plug-in hybrid vehicles in Europe. For example, the power output of Volkswagen’s Golf R has been reduced to lower tailpipe emissions. Moreover, BMW stopped production of the M3 sports saloon.

In fact, due to intense price competition, arising from the new stricter emission rules, BMW revised down its 2018 pretax profit and margin. The operating margin for BMW’s automotive division is now expected to be over 7% rather than in-line with the group’s target corridor of over 8-10%. Likewise, Daimler and Volkswagen alleged the supply distortion due to the introduction of pollution standard and trade spat to be the reasons behind straining profits.

Currently, while BMW has a Zacks Rank #3 (Hold), both Daimler and Volkswagen carry a Zacks Rank #4 (Sell). Moreover, Daimler, BMW and Volkswagen have expected long-term growth rate of 2.8%, 4.5% and 5.9%, respectively.

In the past six months, all these three stocks have underperformed the industry it belongs to. Shares of BMW, Volkswagen and Daimler have lost 15.6%, 18.9% and 24.2%, respectively, in the past six months while the industry declined 7% over the same time.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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