Yes, But Foreign Currency Fluctuations Will Eat Into Profits.
While U.S. agency Fitch Ratings was cheering BMW, Mercedes and VW/Audi prospects, Bernstein Research had some sobering thoughts, saying currency devaluations by emerging nations and Japan might throw a small spanner in the works.
“BMW, Daimler and Volkswagen demonstrate all the attributes of solid investment grade ratings. They benefit from strong market shares, broad diversification and solid brand attributes. Their financial profiles were relatively resilient during the latest crisis,. They weakened less than the rest of the sector and recovered quickly,” the ratings agency said.
Hang on a minute, said Bernstein analyst Max Warburton.
“Are we all asleep at the wheel when it comes to the impending effects of currency on the German manufacturers,” Warburton said.
Warburton said the recent collapse of emerging market currencies had been seen as only hitting local producers and mass market players like Renault.
“But the rich in developing countries like German luxury cars too – BMW and Mercedes each sell over 130,000 units in non-China emerging markets, about seven per cent of total unit sales, accompanied by rich mix and pricing. In addition the Germans ship a lot of cars to Japan, the profitability of which are set to fall sharply due to the yen,” Warburton said.
Warburton said this could cost BMW about 10 per cent of its earnings in the second half of 2013 and next year, and about 12 per cent for Daimler. VW gets off lighter with about a five per cent hit.
“Second – perhaps ultimately even more significant in the long run – is the competitive consequences of the devaluation of the Yen. While one can argue it is not an immediate pressure on the premium brands, it is clear that VW has gone into reverse in the U.S. and is now losing market share. In addition, we believe Toyota will renew its investment in Lexus and will become more assertive in the premium sector in the U.S.,” Warburton said.
It is not that big a deal, says Warburton, but still an important negative.
“These moves are not a deal breaker or stock wrecker for any of the names, but they probably do represent a meaningful headwind,” Warburton said.