BMW Profit Strength Expected To Continue

Upcoming Launch Of 1 And 3 Series Promise More Cost Cuts

BMW’s first quarter profits were so impressive, some investors felt they might be too good to be true.

Deutsche Bank analyst Gaetan Toulemonde pointed out that BMW produced about 48,000 more vehicles than it sold in the quarter, and because of accounting anomalies this boosted EBIT (earnings before interest and tax) by between €300 million and €400 million because of higher fixed cost absorption.

Citigroup Global Markets analyst John Lawson though reckoned the results actually understated BMW’s performance.

In the event, BMW reported its best ever profits in terms of earnings per car and a profit margin of 11.9 per cent. This, according to BMW, represented an average profit margin of €4,462 per car, compared with €4,145 at Daimler’s Mercedes and €2,981 at VW’s Audi. EBIT more than quadrupled to €1.9 billion compared with the same period of 2010.

Commerzbank analyst Daniel Schwarz wondered if big gains were maybe due to one-off currency effects from unsustainable better hedging of risk, but still thought BMW’s prediction of an eight per cent profit margin for 2011 might be too conservative.

Bank of America Merrill Lynch analyst Fraser Hill pointed out that launch costs for the new 1 and 3 Series launches might inhibit profits in the second half by around €500 million. But Hill expected these new model launches (1 Series third quarter 2011, 3 Series January 2012) to realise big long-term costs savings as part of the overall Strategy One plan.

“Strategy One savings are expected to fall to €500 million in 2011 before rising to €1 billion again in 2012. Net per unit cost savings on the 1 series and 3 series are expected in the seven to nine per cent range, much higher than the net three to five per cent savings on the 5 Series. Upside to the €1 billion target in 2012 is possible, in our view,” Hill said.

Bernstein Research analyst Max Warburton talked about a new era for German car manufacturing profits, although he did allow for some possible troubles ahead.

Raising profit forecasts
“This is truly a new era for profitability as booming Chinese demand, recovering U.S. and German volumes, more careful capital investment and 2008/2009 structural cost cuts combine to drive earnings and free cash flow to new levels. We are raising our forecasts for BMW by 18 per cent for 2011 and VW by 23 per cent to join our already above-consensus Daimler forecasts,” Warburton said.

Despite the impressive numbers, he still had some reservations.

“The market still remains sceptical about the sustainability of earnings. Concerns about Chinese growth and localization, about currency and about long-term mix deterioration are all valid. But in our view, the Germans are well positioned to continue to generate high margins,” Warburton said, pointing out that BMW’s product mix in the quarter was rich as high end cars like the 5, 7 and SUVs sold strongly.

Deutsche Bank’s Toulemonde said that despite the impact of the excess production anomaly distorting the profit figures upwards in the first quarter, BMW’s performance was still strong.

“This effect is likely to reverse in coming quarters; hence we don’t believe that the 12 per cent EBIT margin level of BMW is now the “new run-rate,” Toulemonde said.

On the contrary, said Citi’s Lawson.

“We sense the market has so far misinterpreted BMW’s peer-high first quarter margins, seeing these as probably linked to unsustainably high production levels. In contrast, we regard the numbers as rather conservative in character (noting leasing and R&D accounting, for instance as burdens) and are therefore much readier to extrapolate some further upside to our already high-end estimates for the year,” Lawson said.

Has BMW the ammunition to deal with the “worry-factors” of raw material costs, foreign exchange threats, possible difficulties in China, and ever more expensive green regulation requirements, asked Lawson?

Buoyant
“Here we think BMW is still well equipped from a product cycle and product cost perspective and from its lead in fuel economy performance. Just as important is the potential for volume growth and price stability in a globally buoyant and brand sensitive automotive economy – and which we thus expect to continue to be the driver of strong returns,” Lawson said.

Lawson looks for a profit margin of 9.2 per cent for all of 2011, 9.7 per cent in 2012, and nine per cent in 2013.

Neil Winton – May 15, 2011