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BMW Numbers Sifted Again With Mixed Results

Residual Value Issue Worries Investors.

“BMW could lose half its captive finance customers, putting at risk about 25 per cent of group volume”

BMW investors must be feeling a bit bilious.

When the company announced it lost money in 2008’s 4th quarter, shocked investors dumped the stock and ran for the exits. But after some sober reflection, they came back.  Hadn’t BMW been clever to cut production at an even faster rate than sales were dropping, thus preserving cash?

But after another couple of weeks, and another presentation from BMW, investment banks are puzzled.

Adam Jonas of Morgan Stanley was an early doubter, asking “does BMW really have €9 billion” in cash. This was because a key feature of the company’s original financial statement was the change in how it accounts for net liquidity in the auto division.

Jonas has had more time to scour BMW’s books and he doesn’t like what he sees.

“If BMW were to close its captive finance presence or fully pass though the costs of higher finance or lower residual values in its loan and lease pricing, which was strong growth in 2008, we estimate BMW could lose as much as half of its captive finance customers, putting at risk about 25 per cent of group volume,” Jonas said.

Jonas reckons that the €9 billion “cash” should really be accounted for as capital for the faux bank that is the finance subsidiary.

Inhibit premium car buyers
Cash burn is going to be surprisingly high in 2009, says Jonas, rising to the equivalent of about 65 per cent of its current market cap. He expects sales to suffer more than any other company except Porsche (see above) because the credit crisis will inhibit BMW from enticing premium car buyers used to paying a low monthly payment.

Declining residual values and higher losses on BMW’s loan book will lead to more big write-downs.

“We also assume a €4 billion recapitalisation of the financial subsidiary for a total further €5.2 billion cash injection between now and the end of 2010,” Jonas said.

That’s in addition to just under €2 billion of charges related to residual values and loans already taken.

Max Warburton of Bernstein Research, after taking on board all the developments, still remains a firm supporter of BMW.

“We continue to see BMW as the safest place in European autos. While we worry about long-term returns and fear limited peak earnings power because of mix and Anglosphere exposure, and anticipate some further financial services losses, near term it continues to look best positioned to remain very liquid. In the event of a market and sector rally, it will be left behind, but for those who prefer to remain defensive in autos, BMW still has attractions,” Warburton said.

Buy less expensive cars
Deutsche Bank’s Gaetan Toulemonde said lower residuals and higher financing costs will push up monthly lease payments by up to 30 per cent, and customers will compensate by buying less expensive cars.

“The residual value development of last year is likely to have a much longer lasting impact than BMW management is willing to acknowledge today,” Toulemonde said.

BMW investors’ heads must be spinning.

At least this comment from Commerzbank’s Daniel Schwarz is a simple statement of the facts.

“BMW will continue to face headwinds from its model cycle at least over the coming 12 months, until the launch of the new 5-series in mid-2010. In 2009 BMW will have the oldest average model line-up among European peers. With launch of the (Mercedes) E-class (now ramping up) the 5-series will lose further market share, or pay higher discounts,” Schwarz said.


Neil Winton – March 31, 2009

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