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BMW Expects Improving Profit, Plans More Smaller Cars

Investors Think That Might Be An Oxymoron
Doubts Cast On 2012 Profit Targets

Plans Said To Signal Determination To Remain Independent 

BMW pleased investors with its forecast that profits will rise strongly in 2010, then rocked them with news it plans to make more small cars with front wheel drive.

BMW’s net profit dived 47 per cent to €210 million in 2009, recording the company’s worst performance since it lost €2.5 billion in 1999. BMW told a press conference profits would make good progress in 2010, and was on course to meet its 2012 targets.

News BMW plans to make between 700,000 and 800,000 new front-wheel drive cars smaller than the 1-Series didn’t go down well. Investors interpret “small” as “unprofitable”.

“We are seeing these ambitions with large skepticism, as profitability in sub-C segment platforms has been disappointing in most cases within the auto industry,” said Deutsche Bank analyst Gaetan Toulemonde.

Toulemonde was also worried about downward pressure on BMW’s pricing last year because of the weakening product cycle, and doubted that 2012’s targets would be met.

“While from a cyclical standpoint BMW’s profitability is set to increase, with the imminent launch of the new 5-Series and growing volumes, we continue to believe that the company will fail to meet its 2012 targets,” he said.

EBIT target
BMW has said that by 2012, auto EBIT profit margins should reach between eight and 10 per cent.  Last year the margin was 0.7 per cent.

J.P.Morgan Cazenove reckoned the new 5-Series would help propel margins higher in 2010, and believed that BMW’s latest actions meant it was determined to stay independent.

“BMW is working on a front wheel drive small car architecture that can handle volumes of 700,000 to one million a year. In addition, it is attempting to develop scale on its 3-6 cylinder engines, which if realised would produce 1,500,000 engines a year. Both are medium term plans clearly targeted a reducing variable costs, but they also signal the company’s determination to stay independent, and not be forced to participate in any future industry consolidation,” J.P.Morgan Cazenove said.

Neil Winton – March 30, 2010

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