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BMW Most Vulnerable To Japan Fall Out

Damage Unlikely To Be Major, Although 2011 Profits Look Capped
New 1, 3 Series Launches To Provide Substantial Cost Savings

BMW is the most vulnerable of the premium car manufacturers to any supply crunch following the crisis in Japan, but investors are confident that any disruption will be short-lived and manageable.

BMW announced impressive financial results for 2010 early in March and later in the month hosted a meeting of analysts to allow in depth reaction to the figures. Unfortunately, Japan was hit by an earthquake, tsunami and nuclear power generation breakdown in the meanwhile, and investors have been scrambling to see how BMW might be impacted by the crisis, if at all.

According to Frankfurt, Germany based BHF-Bank supply chain disruptions are likely to be worse than initially thought.

“As a manufacturer with smaller purchasing scale, we believe BMW could turn out less diversified on the procurement side and thus be more vulnerable to potential supply shortages. The group’s inventories are low meaning that potential production halt would quickly feed through to underlying volume sales,” said BHF auto analyst Aleksej Wunrau.

In the event, BMW seemed low on the list of manufacturers who might take a hit from supply chain chaos.

BMW’s net income accelerated to €3.23 billion in 2010 from 2009’s meagre €210 million, and easily beat the average analysts’ prediction of €2.91 billion. The auto EBIT (earnings before interest and tax) profit margin was an impressive eight per cent, although BMW was third best in the German upscale profit race behind Mercedes’ 8.7 per cent and Audi’s 9.4 per cent.

At the analysts meeting, BMW said 2011 EBIT earnings would beat 2010’s eight per cent. CEO Norbert Reithofer said there was a good chance that margins would continue in the target range of between eight and 10 per cent, even beyond the original 2012 aim.

Citigroup Global Markets auto analyst John Lawson said despite the impressive numbers for 2010, BMW was remaining low key, and concentrating on some problems ahead, like “regulatory/market requirements” and as it prepared to introduce its first electric vehicles – the i3, i8 EV and PHEV for 2013.

New 6 series
As BMW launches the new 6-Series, and later this year and next the new 1 and 3-Series, Royal Bank of Scotland auto analyst Jose Asumendi said the company’s product momentum was continuing to support stronger pricing power, and ultimately driving group profitability.

Bank of America Merrill Lynch auto analyst Fraser Hill was confident BMW would attain its profit margin target.

Hill said investors who extrapolated BMW’s profit performance from 2004 to 2007 on today’s company were wrong. Then, profit margins were steadily eroded to 7.5 per cent from 8.5 per cent by a combination of higher research and development costs, raw materials increases, and foreign exchange headwinds.

“We model sharply rising R&D and raw materials costs but based on current rates and hedging (of foreign currencies) see nowhere near the same pressures from foreign exchange this time round. Continued growth from new and high margin Chinese earnings allows us to remain confident that the mid-point of guidance is achievable,” Hill said.

Modular construction would produce steady benefits.

“For BMW, the 5,6 and 7 series are now all produced from the same backbone with further gains to be made next year post the new-generation 6 series, 5 series Touring launch and the re-launch of the 3 series in 2012. It is already produced on the same platform as the 1 series, but the number of common parts between the 1 and 3 series will increase from 60 per cent to 80 per cent post the new 3 series launch. By 2013/14, all modular benefits should be delivered,” Hill said.

Still, Hill said higher costs were inevitable because of evolving technology, and safety and fuel economy regulation, while spiking commodity prices of copper and aluminium will hurt in 2011.

Makeable not beatable
BHF-Bank’s Wunrau believed BMW’s profit targets for 2012 and beyond were makeable. Wunrau said BMW, at the analysts meeting, had pointed to middle-triple-digit million cost savings in 2011 and €1 billion in 2012 from the new 1 and 3 series. But the interruptions in Japan would limit progress in 2011.

“We regard the 2011 volume target of 1.5 million and the eight per cent EBIT margin target for Automobiles as achievable but not beatable,” Wunrau said.

Meanwhile, BMW announced a car-sharing scheme in two German cities with car rental giant Sixt, which might be extended across Europe and possibly the U.S. The venture, called DriveNow, aims to win one million customers by 2020, and is aimed at city dwellers who don’t need to own cars, but would like flexible ways to rent them for mainly short periods.

Neil Winton – March 27, 2011

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