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BMW, Pressured By China, Europe, Looses Some Support

But CO2 Moves, Technology Leadership Inspires Loyalty.

Investors are suddenly starting to think the unthinkable, as sales in China stall, and Europe’s economic road looks rocky. Maybe BMW is not a sure-fire winner after all?

That’s the view of investment banker Credit Suisse, although it has to be said that this is a minority opinion, so far. Morgan Stanley said BMW is “future proof” because of its first-moves on the green technology front.

“BMW is well on track to meet future CO2 targets. Industrialisation of lightweight carbon-fibre construction (project i) should protect BMW from undergoing the same negative mix shift to small cars as peers. China is more opportunity than risk. We expect growth and margins to moderate (there), but BMW has built a strong franchise with highly profitable JV in a market that remains underpenetrated with luxury cars. Fears of a downside risk look overdone,” said Morgan Stanley analyst Laura Lembke.

Long-time BMW mentor International Strategy & Investment (ISI) also remains phlegmatic, saying despite its China imports falling 25 per cent in September, this was down to hard-to-meet annual comparisons following strong sales of 3 series and X1s a year earlier, and some dealer and customer concern after government anti-monopoly action. Normal service should be resumed in the current quarter.

But Credit Suisse analyst Mike Dean is worried by China developments and Europe weakness.

“The perception of BMW as a relative safe haven is likely to change as sentiment turns on China and slower volume growth, higher incentives, falling Auto EBIT (earnings before interest and tax), and we forecast little or no third quarter free cash flow. With a rising cost burden for all (manufacturers), we are unlikely to see future costs falling away in 2016,” Dean said.

Increased competition
BMW’s key model sales weakness will be underlined by increased competition from Mercedes, Porsche, Audi, Jaguar Land Rover and Maserati next year.

“BMW faces further negative model momentum, and we calculate its average model age is 3.8 years in 2014 and rising. We are two years away from the new 5-series launch and still 14 months from 7-series,” Dean said.

China provides around 30 per cent of BMW’s operating profit. In the second quarter, BMW raised EBIT to €2.6 billion from €2.1 billion. The auto profit margin jumped to 11.7 per cent in the second quarter compared with 9.6 per cent in the same period of 2013. BMW’s long-term profit margin target is eight to 10 per cent. BMW’s share price has been on the slide recently, along with other automotive companies. It has dropped almost 16 per cent since late July’s €95 to below €80 in mid-October.

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