BMW Investors Unhappy With Lower Profit Trend.
Leasing Business Troubles Some, But Not All.
BMW shares dived 4.4 per cent after news its profit margin fell to 8.9 per cent in 2016 from 9.2 per cent the year earlier, hit by the high costs of launching the new 5 series, and worries about its leasing policy.
Investors are also questioning BMW’s approach to electrification, which looks expensive compared with its German rivals.
Last year also saw BMW lose its crown as the world’s biggest premium car maker to unrelenting rival Mercedes-Benz.
The shares revived a bit in the days after the news, but not by much. Investors are waiting for the full results which are promised for March 21.
Operating profit fell 2.2 per cent in 2016 from a year earlier to €9.39 billion.
Citi Equity Research said it was concerned that it wasn’t just BMW’s product cycle that was holding back its profitability, it was concerns about leasing.
“On top of this an EV (electric vehicle) strategy via a separate brand as well as integration within the broader line-up creates an added R&D burden compared with other German (manufacturers),” said Citi Research analyst Michael Tyndall.
Tyndall continues his “sell” rating on the stock.
“The key reason for the 20 per cent miss in 4Q2016 EBIT (earnings before interest and tax) was higher Eliminations due to strong leasing volumes. This worries us – in part because BMW’s certified pre-owned volumes in the U.S. have spiked by more than 30 per cent in the last year, but also because used vehicle prices are falling,” Tyndall said.
Some experts believe second hand vehicle prices in the U.S. will come under severe pressure as new vehicles boasting new high technology safety aids at little extra cost make old ones look obsolete.
Two prong approach
“BMW’s two prong approach on EV’s looks costly. The company speaks with great pride about the success of its i-series, but to our eyes the 29,000 units delivered in 2016 looks disappointing. Sales of other BMW electrified vehicles – i.e. hybrids – were roughly 4,000 units higher and we presume the expected 40,000 jump in overall electrified BMWs for 2017 will largely be from mainstream products. Maintaining the niche i-brand at the same time as rolling out e-vehicles across the rest of the range creates an additional R&D burden versus the costs being borne by its German peers,” Tyndall said.
Barclays Equity Research thought the accounting technicalities behind BMW’s leasing results reflected higher profitability in the business.
“We know that the market is bearish on the outlook for leasing but we think it is reassuring that BMW continues to make strong profits in this business,” said Barclays Equity analyst Kristina Church.
Church felt the initial stock market reaction to BMW’s results was overdone, and the company remains its “Top Pick” in the auto sector because of opportunities in China, the profitability of new products, and its technological leadership.
Meanwhile investors await the full details from BMW later this month.