“We continue to believe that BMW shares present a good combination of value and resilience in these uncertain times”
BMW Profits Accelerate But Investors Question Quality
As sales growth in China slows and Europe’s economic prospects get murkier, investors are worrying that despite impressive looking financial results German luxury car maker BMW may have trouble making any more profit progress.
And they wonder if competition from rivals like Mercedes and Volswagen’s Audi, not to mention non-Germans like Tata of India’s Jaguar Land Rover and FCA’s Maserati, and Toyota’s Lexus in the U.S., might also make life a bit difficult for BMW.
In 2014’s third quarter BMW raised earnings before interest and tax (EBIT) to 2.26 billion euros ($2.82 billion) compared with the same period of last year. The automotive profit margin rose to 9.4 per cent from 9.0 per cent. BMW’s long-term profit goal is between eight and 10 per cent.
The numbers looked good, but investors weren’t overly impressed, and drove BMW’s stock price down close to 82 euros from about 86, but this recovered on Wednesday to just below 84 euros. The stock peaked at close to 95 euros in July, before investors began to wonder if the good times in China might not go on forever.
China provides around 30 per cent of BMW’s operating profit.
Bernstein Research analyst Max Warburton peered behind the numbers a bit and had his doubts.
“We would argue that underlying profitability experienced a marked deterioration versus (the second quarter) – more than is normal with seasonality. It’s hard to quibble with nine per cent plus margins – especially when the stock already discounts lower profitability – but it seems trends at BMW are less encouraging than at Mercedes,” he said.
Underlying weak
Warburton said the strong-looking profit performance was boosted by factors like over-production and a change in the way R&D spend was calculated.
“We’d argue that the likely underlying performance of BMW was a little weak in Q3, in contrast to the trend at Daimler,” he said
Some critics argue that BMW’s new model program is starting to lag behind the main competitors Mercedes and Audi. BMW’s core model lineup – the 3, 5, 6, and 7 series cars have been around for a while. Next year BMW will launch its all-new flagship 7-series, while the big selling 5-series isn’t renewed until 2017. BMW makes Minis and Rolls Royces too.
Even if BMW’s model lineup is looking a bit long-in-the tooth compared with Mercedes, BMW does get plaudits for its investment in fuel-sipping vehicles as it prepares for swingeing new regulations in Europe in 2021, and the U.S. in 2025.
Lack quality
Credit Suisse analyst Mike Dean described BMW’s earnings as lacking in quality, and he noted that the company characterized the outlook for sales growth in the current quarter as “solid” compared with the previous description of “significant”. He said BMW is suffering from a slump in imports into China – down about 20 per cent – and an ageing key model lineup, with 3/5/6 and 7 series cars sales down 10 per cent in the quarter.
Morgan Stanley analyst Harald Hendrikse agreed that investors may have some questions about the underlying quality of BMW’s earnings, but this didn’t distract him from his overall positive opinion.
“We continue to believe that BMW shares present a good combination of value and resilience in these uncertain times,” Hendrikse said.
Evercore ISI Global Automotive analyst Arndt Ellinghorst retained his bullish stance on BMW, although he took on board investor notions that earnings might have peaked. He pointed out that earnings progress has been much better than expected at the start of the year.
“We believe Q4 is set to benefit from strong volume momentum and we are also keeping our view that 2015 will be a growth year with positive earnings and cash flow leverage,” Ellinghorst said.
Meanwhile in the U.S., BMW was slightly ahead in the race for top selling luxury brand with 267,193 sales through October compared with 261,804 for Mercedes in 2nd place. Lexus was in third spot with 244,038.
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