BMW Profit Shortfall Suggests The Good Times May Be Over.
“its fortunes could be at a turning point. Threats from environmental regulations, technological change and new competitors are huge”
BMW’s sharp drop in profits couldn’t have been a surprise to investors. After all BMW warned this would happen in September.
But BMW’s stock price tumbled 2 per cent after the news and shed another 1 per cent the next day, as the idea caught on that BMW was maybe on the slide after years of making fat profits.
“The enjoyment of driving an “ultimate driving machine” has made BMW one of the top luxury car brands. But its fortunes could be at a turning point. Threats from environmental regulations, technological change and new competitors are huge,” the Financial Times Lex column said.
Max Warburton, analyst with Bernstein Research, also wondered whether this signalled at least a temporary end to the good times for BMW. Perhaps it should take its foot off the accelerator for a while.
“There have long been signs that BMW was pushing volumes too hard in key markets at a time of failing relative brand strength – with the pressure from Mercedes and other brands from Land Rover to Tesla increasing. We believe BMW’s problems are partly due to over-ambitious sales goals, with the decision to step back overdue,” Warburton said.
Mini, and Rolls Royce Too
BMW, including its Mini and Rolls Royce brands, reported a 27 per cent drop in third quarter operating profit to €1.75 billion compared with the same period of 2017. BMW cited higher raw material prices, currency effects, higher costs of warranties, the tariff war between China and the U.S., and a price war in Europe for the fall.
The automotive profit margin fell to 4.4 per cent from 8.6 per cent a year ago, and compared with its long-term target of between 8 and 10 per cent. A big chunk of that fall was because of unexpected warranty claims.
It seems that investors have been worrying about the future of BMW all year, as the share price slid nearly 23 per cent between early January, and the current level at just over €70.
In late September, BMW cut its profit forecast for 2018, saying its automotive EBIT (earnings before interest and tax) will fall to at least 7 per cent, compared with the previous forecast of between 8 and 10 per cent.
Since the profit warning BMW share have fallen nearly 14 per cent.
Investment researcher Evercore ISI still has faith in BMW’s long-term prospects.
“Despite all the Q3 criticism, the world is not coming to an end in Munich. It’s fair to say that BMW should have done better during the last quarter but, at the same time, Mercedes and (VW subsidiary) Audi have far greater issues, namely with their engines and consequently regulators,” Evercore ISI analyst Arndt Ellinghorst said.
European carmakers have been struggling to meet new European Union rules on fuel efficiency which came into force on September 1. Sales boomed in August as manufacturers sought to sell off vehicles that wouldn’t meet the new rules. Sales have subsequently been on a roller coaster and should return to normal by year end. Ironically, BMW was one of the few companies that was well prepared for the rule change, but was caught up in the subsequent price war.
Ellinghorst said competitors like Volvo and Jaguar Land Rover are struggling and burning cash.
“Appreciating the broader challenges faced by premium players is critical to putting BMW’s Q3 in context,” he said.
“Earnings momentum will most likely not improve until the second half next year, when BMW’s new product – the X5, X7, 8 Series, 3 Series and Z4 – will be fully available,” he said.
Ellinghorst said he expects BMW to deliver a 7.5 per cent autos EBIT profit margin in 2019.
Bernstein Research’s Warburton also took some comfort from BMW’s new product portfolio.
“BMW refuses to step away from the long-term 8-10 per cent EBIT margin corridor and promised new cost actions. The new X5 and X7, on sale in 2019, will be high margin products. A new 3 series will also help. BMW sounds more confident on China than many. Maybe, just maybe, BMW could grow profits next year, off the lowered 2018 base?” Warburton said.
Meanwhile all bets will be off if the trade dispute between the U.S. and China worsens, or another one starts between the U.S. and Europe, while the industry is crossing its fingers hoping for a smooth exit by Britain from the European Union.