BMW Profit Margin Beats Audi, Impresses Investors.
Company Said Well Prepared For Any Possible Downturn.
“continues to deliver solid sales growth and healthy mix”
BMW increased second quarter earnings nearly 8% and its profit margin exceeded Audi’s, and although some investors are beginning to worry about an economic slowdown they reckon the Bavarians are well prepared.
Cheerleaders for BMW were impressed by the fact its profit margin – 9.5 per cent in the quarter – beat fellow premium vehicle maker Audi’s 8.7 per cent, which should be able to easily make more money because it uses many components already developed and paid for by owner, Volkswagen. Mercedes said its margin in the period was 10.0 per cent.
BMW’s second-quarter earnings before interest and tax rose 7.9% to €2.73 billion compared with the same period of 2015. BMW said it retained its forecast for the year of a slight increase in profit, with the margin within its long-term target of between 8 and 10%.
Analysts said sales in July, up some four per cent, were boosted by demand for the X1 and 7-series, while the new plug-in hybrid 330e is doing well too.
Barclays Equity Research was well pleased with the results, although it expressed some anxiety about the outlook for the automotive sector generally.
“We think BMW is one of the highest quality names in the sector and best prepared for downturns,” said Barclays analyst Kristina Church.
Church said most investors don’t expect BMW earnings to grow at a greater rate than the forecast, so there is little risk of a profit downgrade.
BMW has invested sensibly for the future.
“We think BMW can cut spending quickly if necessary (if there’s a downturn) due to high investment over the past few years. We think management has already spent for 2020 (E.U.) emissions regulations and are far advanced in its i-NEXT strategy on future mobility,” Church said.
BMW is planning a range of “i” brand electric vehicles. So far this includes the i3 all electric vehicle and i8 plug-in hybrid sports car. An all-electric i5 is expected to challenge the Tesla Model X.
Church said BMW’s €16.5 billion cash pile means it can face down any U.S. worries about the level of incentives and saloon demand there. China remains a growth market for premium vehicles, although its profitability is slowing.
Citi Equity Research lauded BMW’s success, but wondered if it was repeatable.
“BMW has done a great job sustaining its margins, but that’s the issue. The company is at or near the weakest point in its product cycle and is still producing margins towards the top of its guided 8-10 per cent range, which begs the question, where is the upside,” said Citi analyst Michael Tyndall.
“We would like to be more excited about the forthcoming product refresh, but we don’t see the scope for meaningful improvement in margins,” Tyndall said.
The Wall Street Journal’s Heard on the Street columnist Stephen Wilmot said BMW’s shares look cheap but investors shouldn’t bet on a rebound. Wilmot was worried by BMW’s need to spend heavily to compete in new technology with the likes of Tesla and Google, although he said it was ahead of the game compared with other Europeans.
Closer to reality
“Eventually, new ownership models for all-autonomous cars may free manufacturers from being shackled to the whims of consumers. That hope looks closer to reality at BMW than at other European car makers. But it is still well beyond the horizon of even the most long-term stock investors,” Wilmot said.
Morgan Stanley agreed BMW shares look cheap, and the company is well prepared for bad times.
“We believe BMW (shares) still look cheap in the context of a market at all-time highs, and relative to defensive trading on all-time highs – for as long as market levels hold. At least BMW has real cash flows and plenty of industrial net cash to somewhat reduce its cyclicality,” Morgan Stanley analyst Harald Hendrikse said.
Investment researcher Evercore ISI was impressed by the fact that BMW included the cost of the Takata air bag recall in its profit figures, unlike Mercedes, which excluded this number from its profit margin.
“We find it quite remarkable that BMW is effectively the most profitable and stable German premium carmaker despite lower mix and an older fleet compared to its peers in Ingolstadt (Audi) and Stuttgart (Mercedes),” said Evercore ISI analyst Arndt Ellinghorst.
“BMW remains a steady and impressive company and July’s sales confirm our prognosis. The company continues to deliver solid sales growth and healthy mix,” he said.