BMW Profits Under Pressure As Mercedes Turns Up The Heat.
“After a surprisingly strong (first half) the Automotive margin starts to come down due to rising costs as well as challenging pricing in the U.S.”
Sliding sales in the U.S. are pressurising BMW’s profits as rival Mercedes overtakes it in the global race for leading premium vehicle maker, but investors have mixed views on prospects.
BMW’s auto profit margin fell to 8.5 per cent in the third quarter from 9.1 per cent in the same period last year. BMW has a long-term target for profits of between 8 and 10 per cent. BMW’s overall profit in the 3rd quarter rose just over 1.1 per cent to €2.38 billion euros. BMW said profit and sales will rise slightly for the whole year.
For the latest quarter BMW said demand for SUVs boosted sales in Europe and China, compensating for weakness in the U.S.
In October, BMW’s U.S. sales fell almost 20 per cent to just over 24,000.
In the first 9 months of 2016 Mercedes sold 1.54 million cars globally for first place in the premium sector, ahead of BMW’s 1.48 million. Mercedes had set 2020 as the target for replacing perennial title winner BMW. Audi is 3rd with sales of 1.41 million.
Investors were divided on BMW prospects despite the fact they are considered cheap by comparison with competitors.
Barclays Equities Research said BMW remains its top pick in the global automotive sector because it has good defensive qualities if there’s a downturn, and a reasonable new product line-up if times are good.
“(BMW) offers the best opportunity for earnings upside in 2017 were the cycle to prove supportive, but equally the least downside risk were the cycle to start to turn,” said Barclays analyst Kristina Church.
BMW will launch a new 5 Series in February 2017, which competes with the Mercedes E class, Audi A6, and Jaguar XF.
Church said BMW’s stock price had been undermined by investor worries about high spending on new technology and a power struggle with suppliers concerning arguments about exactly which new power-train technology will emerge as the winner.
“We think premium (manufacturers) are cleverly ring-fencing (spending) for the most exciting long-term trends and allowing suppliers to “waste” investment on interim technologies such as hybridization,” Church said.
Citi Research believes BMW’s profit will remain stagnant for the next year, and the company’s great success in the past makes it difficult for it to get much better. Citi also worried that huge spending on new technology was taking place despite uncertainty over its timing and the scale of the pay-off. Citi recommends investors sell BMW shares.
Commerzbank reckoned BMW margins are under pressure.
“After a surprisingly strong (first half) the Automotive margin starts to come down due to rising costs as well as challenging pricing in the U.S. We expect this trend to continue and believe the margin will remain at the lower end for the coming quarters,” said Commerzbank analyst Sascha Gommel.
“Obviously the shares look attractive given the low valuation. However, the whole sector is trading at very low multiples but we see more surprise potential at PSA and Daimler (Mercedes parent),” Gommel said, who rates the shares as a “hold”.