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BMW Profit Hit By EU Fine Provision; Looks To Strong 2nd Half

BMW Profit Hit By EU Fine Provision; Looks To Strong 2nd Half.

“So underlying numbers met expectations, although the provision taken for risks from EU fines was higher than expected”

BMW said its main automotive division lost money in the first quarter, but investors were relieved to hear this was because the company took a 1.4 billion euro ($1.6 billion) one time hit from a likely European Union (EU) fine.

BMW group’s first quarter operating profit fell nearly 80% to 589 million euros ($659 million) compared with the same period last year.

BMW CEO Harald Krueger put a confident face on the news.

“We remain firmly on course and expect business to benefit from tailwinds, especially in the second half of the year, as numerous new models become available,” Krueger said in a statement.

BMW is launching a plethora of new models now and later this year, including the 1 Series, M3, X7,  iX3, 7 series sedan, 8 Series convertible and 8 Series Gran Coupe. 

BMW said the automotive profit margin will fall to between 4.5 and 6.5% for 2019, not the 6 to 8% expected earlier, and compared with the long-term profit margin target of 8 to 10%.

BMW shares were down about 1.5% at 72.88 euros in late morning trading in Europe.

Bernstein Research analyst Max Warburton said the pressures mounting in 2019 are no surprise as markets weaken around the world and worries mount that a trade war might disrupt the business of companies like BMW.

“So underlying numbers this morning met expectations, although the provision taken for risks from fines for EU anti-trust violations was higher than expected,” Warburton said.

China weak
BMW sales rose slightly in the first quarter to 605,333. Sales fell about 2% in the U.S., were about unchanged in Europe, and jumped 10% in China where the underlying market is weak.

Citi Research analyst Angus Tweedie said BMW was relatively solid compared with Mercedes’ first quarter performance.

“Reflecting this, we see little to change our negative stance (on BMW shares) with earnings clearly remaining under pressure even before we consider the risks around electrification, tariffs and the unwind of historic capitalization and financial services profit transfers,” Tweedie said.

Investment researcher Evercore ISI said the exciting times for BMW of high margins and strong cash flows were over, for now, and didn’t share CEO Krueger’s high hopes.

“We remain sceptical regarding this optimism as we don’t see much stronger end-markets and we remain worried that U.S. auto tariffs in conjunction with CO2 could darken the horizon,” Evercore ISI analyst Arndt Ellinghorst said.

EU rules on CO2 emissions tighten considerably next year and Europe’s big manufacturers face bottom line destroying fines if they fail to meet them.

Bernstein Research’s Warburton said BMW does face an uphill struggle. 

“It’s the core business that matters and with an auto margin of 5.6% and negative free cash flow it’s evident that BMW is struggling to deliver its target level of profitability. The factors behind this are unlikely to ease anytime soon,” Warburton said.

“The problem is cost. BMW is having to sell ever more electrified cars, mainly plug-ins, which are impacting margins,” Warburton said. 


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