Jaguar Land Rover Weaker Profit Outlook Alarms Investors.
“expectations for future margins will now need to fall, following JLR management guidance for elevated costs continuing”
British based premium auto maker and Tata Motors of India owned Jaguar Land Rover (JLR) spooked investors with a surprise dip in profitability as its ambitious new SUV program took a toll on the bottom line.
Investors hope that profitability will be restored as profits from new compact SUVs like the new Range Rover Velar and Jaguar E-Pace as their launches gain momentum but analysts don’t expect recent fat profits to be within reach for a while yet as the ambitious product renewal program has costs spiralling. The Velar will launch in September and the E-Pace a bit later. The new Discovery began sales in the U.S. and China in June. Range Rover and Range Rover Sport are being face-lifted.
The headline numbers looked good. In the first financial quarter ended June 30, JLR’s profit before tax rose to 595 million pounds ($772 million) from 399 million ($518 million) in the same quarter last year. But the profit included a one-time gain of 437 million pounds ($567 million) as the company changed the way it calculates pension liabilities.
Since the end of July, the stock price for owner Tata Motors has dropped nearly 20%.
Sales of Jaguars and Land Rovers rose 3.5% to 137,460 in the quarter, propelled by the new Jaguar F-Pace SUV. As well as the Velar and E-Pace, Jaguar plans to launch a new electric car in 2018 – the I-Pace.
Bernstein Research said it expects the launches to be successful, but sees profitability coming under pressure.
“JLR’s (1st quarter) accounts showed a meaningful deterioration in underlying profitability, driven by material costs and operating expenses which were both much higher than expected. Guidance from JLR for elevated costs continuing through most of fiscal 2018, and flat headline margins year on year, mean we’ve had to meaningfully reduce our forward margin forecast for JLR,” Bernstein Research analyst Robin Zhu said.
“With JLR costs growing faster than revenue, and rising expenses also contributing to disappointing margins we continue to have high hopes for JLR’s upcoming launches, and expect Velar and E-Pace to be successes. But expectations for future margins will now need to fall, following JLR management guidance for elevated costs continuing,” Zhu said.
Investment researcher Evercore ISI described JLR’s performance as hardly profitable, and that was due to a questionable method of accounting for research and development. The future looked challenging, with financing a worry.
“It is important to note that JLR operates at the peak of the SUV boom and it’s hard to see how things can get much better from here. If anything, the world is getting tougher. So far, JLR has done an impressive job in developing business without much external funding. It’s an open question as to how (CEO) Ralf Speth and his team will shape the future,” Evercore ISI analyst Arndt Ellinghorst said.
Bernstein’s Zhu said investors in parent company Tata Motors were surprised by the sudden lurch downwards in profits.
“The bulk of investor feedback post-earnings has boiled down to frustration at management communication and execution. Will a few percent of margin expansion be enough for the market to put renewed faith in management,” Zhu said.
“Is spending at JLR getting out of control,” asked Zhu.
This is running on overdrive, he said, as the company seeks to meet a volume target of 1 million by 2020-2021.
JLR sales reached 604,009 in the previous financial year. Zhu recently estimated volume of 732,000 by 2020, and 848,000 including the China joint venture.
Zhu said JLR is now talking about a more upmarket version of the Range Rover to compete with the awesome Bentley Bentayga, another Discovery version, and many electric ones.
“These should support JLR’s volume growth in the coming years. But the associated costs perhaps explain JLR’s expectations of higher near-term costs, and lower future margins,” Zhu said.
Earlier this year, when JLR profits looked to be accelerating, Reuters reported Tata Motors planned to spin-off the company it bought from Ford Motor about 10 years ago for $2.4 billion. Tata denied the report. Profits will have to perk up before the issue becomes live again.