“BMW has the youngest fleet out of the premium makers and is set to continue through 2015 and 2016 ahead of the launch of the 5-series”.
BMW’s profits go from strength to strength, and investors are only divided by the amount of exuberance they show about the company’s future.
Leading the cheering is Arndt Ellinghorst, analyst with International Strategy and Investment (ISI) in London.
After underestimating BMW’s first quarter performance, Ellinghorst expects profitability to continue to grow because of its new model programme and cost management.
BMW reported first quarter operating profit otherwise known as earnings before interest and tax (EBIT) rose three per cent to €2.09 billion compared with the same period of 2013 as sales gained four per cent to €18.2 billion. Automotive margin was 9.5 per cent. BMW’s long-term goal is for profits between eight and 10 per cent. In the first quarter, German rivals Mercedes made a seven per cent margin while VW’s Audi earned 10 per cent.
BMW said sales gains were led by its SUVs including the compact X1, mid-size X3 and big new X5. BMW retained its forecast for 2014 that EBIT will gain significantly, as new models like the 4-series Gran Coupe and 2-series compact reach global markets.
What is significant?
This led Max Warburton of Bernstein Research to wonder what “significant” really means. Warburton, on the more realistic side of exuberance, said the results suggest numbers for the year will be fairly modest even if acceleration gains ground, pointing to the slower growth in sales compared with the profit gain.
“Our conclusion (after the latest figures) is that what BMW defines as “significant” may not be enough to excite the (stock) market in 2014. BMW is a formidable company enjoying strong profitability, but we believe there are now better (investment) opportunities in the sector,” Warburton said.
Harald Hendrikse of Nomura is impressed with BMW.
“BMW remains the best in class, and protected by its premium-only brand exposure. China remains the risk in the ointment,” Hendrikse said.
China provides around 30 per cent of BMW’s operating profit.
ISI’s Ellinghorst expects BMW’s global profit margin to rise to 9.6 per cent in the first half of 2014, to 9.7 per cent in the second half, and 10.0 per cent in 2015. He said BMW’s model lineup is keeping it ahead of the competition.
“BMW has the youngest fleet out of the premium makers, thanks to the recent launch of the 3-series and X5 as well as additional new models including X4, 4-series, 2-series Active Tourer and Project “i” vehicles,” he said.
“Indeed, given BMW’s advantage today, the company is set to continue to have the youngest fleet through 2015 and a competitive fleet in 2016 ahead of the launch of the 5-series in late 2016/early 2017,” Ellinghorst said.
Ellinghorst said BMW increasingly uses modular engines and components.
“(this) allows the company to bring to market a greater diversity of product than its peers. Not only is this beneficial to the top-line (sales), as BMW launches incremental vehicles lines, but also to its earnings and margins,” Ellinghorst said.
Philip Watkins of Citi Research was less enthusiastic.
“A decent start to the year, though as the Autos margin (BMW makes motorbikes too) was slightly lower than (analysts) consensus we are expecting a relatively lacklustre response to earnings (from the stock market) – particularly as expectations for the year are high,” Watkins said.
BMW aims to sell two million cars in 2014 for the first time, and expects to be number one premium car seller globally for the 10th straight year.