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BMW Profit Soars To New Highs, But Pace Will Slow

Rest Of 2011 Faces Higher Costs, Dollar Threat, New Model Costs
Investors Expect BMW To Reach 8-10 Per Cent Target With Ease

“BMW profitability is stunning. Only Porsche and Ferrari can claim to have met or exceeded this level of profitability”

“First in class”. “Quite Simply Awesome”. Stunning”

That was the reaction from some excited investors to BMW’s sensational results for the second quarter, but perhaps inevitably, the German premium car maker was quick to point out that even though things are looking good, the second half will not quite reach that level of perfection.

Boosted by big sales in China and a rebounding U.S. performance, BMW’s earnings before interest and taxes jumped to €2.86 billion in the second quarter, from €1.72 billion in the same period a year ago. This trounced the consensus of analysts’ average forecasts from Bloomberg of €2.3 billion.

The results also allowed BMW to grab the bragging rights as the most profitable German luxury car maker with its EBIT profit margin of 14.4 per cent, beating Audi’s 11.8 per cent and 10.7 per cent at Mercedes-Benz.

“Quite simply awesome,” said Bernstein Research analyst Max Warburton. “BMW profitability is stunning. We think that only Porsche and Ferrari can claim to have ever met or exceeded this level of profitability in the global auto industry,” Warburton said.

“First in class,” said Royal Bank of Scotland analyst Jose Asumendi, but he warned that BMW hinted at a weaker second half performance because of higher raw material costs, and the costs of product model changes as the company introduced the new 1-Series in coming months and the new 3-Series early next year.

Commerzbank’s Daniel Schwarz pointed out that BMW had benefitted from several factors in the first half.

“Peak in cycle, foreign exchange tailwinds, much more that at Daimler and VW, 102 per cent capacity utilisation, modular strategy. Part of that will turn into a burden in the second half. In particular, BMW’s profits from foreign exchange hedging are not sustainable,” Schwarz said.

Rosy prospects
Deutsche Bank’s Jochen Gehrke said even though the second half won’t be as good as the first, BMW’s prospects are rosy.

“As expected BMW guided for a weaker second half result which will be impacted by rising raw material prices, higher employee bonuses and most importantly by higher launch/product changeover costs given the 1-3 Series changeover. As a result we now expect second half profitability to drop to 10 per cent, still at the high end of the targeted 8-10 per cent EBIT margin range and very solid in historical context,” Gehrke said.

Meanwhile, ratings agency Moody’s Investors Service raised its view of BMW, saying it expected BMW to sustain high levels of performance over the next couple of years. Moody’s expects BMW to achieve the 8-10 per cent EBIT margin for the next three years because it is:

  • Leading premium manufacturer with strong brand equity.
  • Leader in reducing CO2-emissions.
  • Global presence, although still dominated by Europe and North America.
  • Broadening product range lessens dependency on single model.

But Moody’s did find some areas that might cause BMW difficulties:

  • Relatively high R&D because of its small comparative scales particularly for electric cars.
  • Persistent pressure on residual values in Europe.

Moody’s said it believed that even if China demand became sluggish, BMW wouldn’t be unduly harmed.

Bernstein’s Warburton tried to find some reasons which would call into question BMW’s ability to sustain this performance. He failed.

“BMW’s margins are so stunning that inevitably, the debate will return to the question of “are we at peak”. We certainly are for 2011 – the second quarter is seasonally the strongest quarter for almost all automakers. With China’s sales beginning to stabilise and with currency probably a headwind from here, we’d expect second half margins to be below the first half. But coming from the heights of 14 per cent, surely they will remain above 10 per cent? And looking into 2012, while BMW has challenges like dollar exposure and technology spending, are they really going to see earnings roll over?”

“Assuming China remains robust, U.S. and German demand remain at current levels and the 3 Series introduction goes to plan, we see few reasons why BMW earnings should fall significantly from 2011 levels. BMW looks set to continue to deliver quite simply awesome results for some time yet,” Warburton said.

Neil Winton – August 15, 2011

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