BMW Profits For 2010 Expected To Advance

BMW improved profits in the first quarter at a strong rate that surprised analysts, thanks to strong luxury car sales in markets like China, but doubts remain over its long-term bottom line targets.

Leading the bulls, Morgan Stanley autos analyst Adam Jonas said BMW is poised to do well in the U.S., where sales are recovering faster than expected and will also benefit from the falling euro against the dollar, which will support profit margins.

In the first quarter, BMW earned net income of €324 million compared with a loss of €152 million in the same period of 2009. According to news agency Bloomberg, analysts had expected net income of €264 million. BMW also announced that it will significantly surpass its goal of reducing spending on components by €4 billion by 2012, helped by a partnership with Daimler to share development of some engineering of parts.

According to Jonas, BMW has a solid outlook for 2010, with sales reaching 1.3 million and earnings rising significantly over 2009. Sales were 1.29 million in 2009, BMW’s lowest since 2004.

BMW’s net profit dived 47 per cent to €210 million in 2009, recording the company’s worst performance since it lost €2.5 billion in 1999.

Jonas said that BMW reiterated its target of eight to 10 per cent margins for the auto segment by 2012. Last year the margin was 0.7 per cent. He didn’t say whether he thought BMW would meet this target, although he raised his profit targets for 2010, 2011 and 2012.

Other analysts don’t see the 2012 target as realistic.

“While we have a positive takeaway on the achievements of BMW throughout the first quarter, we remain sceptical whether BMW will be able to meet is 8-10 per cent EBIT (earnings before interest and taxes) margin expectations for 2012,” said Deutsche Bank analyst Gaetan Toulemonde.

5 Series
Toulemonde expected product momentum to boost profits this year, as the new 5 Series reaches showrooms in ever increasing numbers.

Citibank Global Markets analyst John Lawson reckons BMW will be able to improve profits long-term, helped by the new 5 Series, and new 1 and 3 Series in 2011 and 2012, which will also be the recipient of new cost-cutting methods. But he also remained silent on the possibility of BMW reaching its 2012 target.

Bernstein Research analyst Max Warburton detected a less confident tone to BMW management’s latest thoughts, and wondered if this might reflect a meeting earlier with German Chancellor Angela Merkel, apparently depressed by developments in Greece.

“We’re doubtful BMW will deliver a rapid increase in margins in 2010 and we remain unconvinced it will reach its guidance of 8-10 per cent margins in 2012,” Warburton said.

Warburton said BMW’s profits lagged behind Mercedes – 7.0 per cent compared with BMW’s 2.7 per cent in the first quarter – and said some experts reckoned that this was in part due to the fact the new Mercedes E Class had been successfully delivering strong margins. Wouldn’t BMW’s new 5 Series reverse the momentum?

“We’re not so convinced. While clearly a new 5 Series will help earnings later in 2010, obviously the much higher volume 3 Series will be ageing at the same time, so the net effect may not be that potent,” Warburton said.

Warburton is still apparently reeling from BMW’s announcement in March that it will make between 700,000 and 800,000 new front-wheel drive cars, smaller than the 1 Series, which won’t help profitability.

For investors,  “small” means “unprofitable”.

Sceptical
“We remain somewhat sceptical that BMW can power towards its very ambitious 2012 targets. While there are some obvious positives – the strengthening dollar, the German and UK corporate markets and rapid emerging markets growth, these all benefit Mercedes too,” he said.

But Morgan Stanley’s Jonas thought for 2010 at least, the omens for BMW were pretty positive.

“Assuming BMW can keep its first quarter margin performance for the full year suggests an earnings level around 30 per cent above consensus and 60 per cent higher than our forecasts. Out of all the companies under our coverage BMW is the most exposed to improving credit/leasing conditions and a recovering U.S. dollar versus the euro,” he said.