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BMW Profits Slip, But Long-Term Payoff Expected

Spending On CO2 Mandates Hit Earnings.

“We think BMW continues to do just great. BMW remains slap bang in the middle of its target 8-10 per cent margin range”

BMW’s profits have taken a bit of a hit in the short-term because of the huge spend on research and development, but investors expect this to pay off big in the long-term.

Others though warn that the pay-dirt may not be as rich as in the past, and point out that much of the spending to produce more fuel efficient cars results from government carbon dioxide regulations and will mean more sales of electric cars which have much lower profit margins than traditional vehicles.

BMW’s automotive earnings before interest and taxes (EBIT) fell six per cent to €1.55 billion in the third quarter compared with the same period last year. The automotive margin slipped half a percentage point to nine per cent, well within the long-term target of eight to 10 per cent. This compares with 9.4 per cent at VW’s Audi and 7.3 per cent at Mercedes.

BMW’s full year EBIT target remains to roughly equal 2012’s €7.82 billion.

 Citi Research analyst Philip Watkins said BMW’s increased R&D spending should reap benefits over time, but warned there’s no guarantee.

“…. we believe that these new investments are unlikely to reap the same kind of returns as in the past. We understand that the regulatory environment necessitates investments in the electric power-train but this doesn’t mean it’s positive for (profit) margins as well. Electric cars are unlikely to be as profitable as gasoline fuelled cars, in our view,” Watkins said.

Suppliers only benefit
“We think it is only suppliers that benefit from this dynamic. And though BMW has a lead in electric cars for now in the premium space, its German peers are also expanding,” Watkins said.

Morgan Stanley analyst Laura Lembke was unimpressed by BMW’s latest numbers and talked about “weak underlying profitability”. But she believed most of the capital spending on the electrification project was now out of the way, and BMW was ahead of the game.

“Fundamentally, however, we note that BMW is once again a step ahead of peers in terms of Euro 2020 compliance,” Lembke said.

A tougher set of CO2 rules is expected to start in 2020, although the current talks are now in limbo after Germany vetoed proposed rules which it believed would penalise its companies.

Rising auto margins
Berenberg Bank cut its earnings estimates by between one and two per cent for 2014 through 2016, expecting lower sales revenues and falling profit margins. The bank now expects an autos margin of 8.6 per cent in the current quarter, 8.8 per cent in 2014 rising to 8.9 per cent in 2015 and 9.3 per cent in 2016.

Bernstein Research analyst Max Warburton liked what he saw in the numbers.

“We think BMW continues to do just great. BMW remains slap bang in the middle of its target 8-10 per cent margin range” Warburton said.

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