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BMW Investors Worry About Challenges, Despite Strong Profits

BMW Investors Worry About Challenges, Despite Strong Profits.

“(dividend policy) is a reflection of the very limited visibility into the future and the upcoming challenges”

BMW investors were disappointed by the lack of a special celebratory 100 birthday extra dividend and worried about China and toughening competition from Mercedes and Audi, despite solid financial results for 2015.

There were also worries that the strong looking profit performance in the fourth quarter owed more to one-off foreign exchange gains, rather than an underlying improvement in the business.

BMW’s net profit rose 10 per cent to €6.4 billion in 2015 compared with the previous year, while revenue increased 15 per cent to €92.2 billion.

In the fourth quarter the autos profit margin hit 9.6 per cent, much better than expectations of 8.0 per cent, and Morgan Stanley’s forecast of 7.7 per cent which would have been under BMW’s long-term target of between eight and 10 per cent.

“We were expecting a much weaker margin performance from BMW in (the fourth quarter) given the slow sales growth (just 2.5 per cent in the quarter, the slowest since 2009) and weaker mix,” said Morgan Stanley analysts Harald Hendrikse.

Sales of Series 1, 2 and X3 vehicles had grown, while Series 3, 5, 6, and 7 declined.

BMW sales in China rose 1.6 per cent in 2015 after expanding 16.6 per cent in 2014.

Hard to evaluate
“Without further details on production, inventories and R&D capitalization, nor cash, we cannot yet evaluate the quality of the beat, but given very large eliminations, we think FX (foreign exchange) has played a part here,” Hendrikse said.

BMW had been expected to pay a big, special dividend to shareholders in part to commemorate the company’s 100th birthday, but raised it only slightly to €3.20 a share from €2.90. This was seen by some investors as an acknowledgement that tough times ahead require the conservation of cash.

“The fact that the company has decided not to distribute excess liquidity to shareholders can be seen as a reflection of the very limited visibility into the future and the upcoming challenges with respect to power-train developments and the digital consumer,” said investment researcher Evercore ISI analyst Arndt Ellinghorst.

“In essence, cautious investors see their views confirmed that BMW’s past profitability will be materially challenged in the future,” he said.

BMW guided investors to expect “further sales volume growth” in 2016.

Steady as ever
According to Morgan Stanley’s Hendrikse this all underlined the fact that BMW remained as steady as ever, with some caveats.

“(Estimates) suggest slow growth at best, with slower U.S. and China demand growth, possible credit headwinds, and increased competition from Mercedes again. We believe margin risks remain on the downside, with pricing an increasing concern in slower growth markets,” Hendrikse said.

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