BMW Raises Profit In Quarter, Beating Expectations.
But Some Investors Worry About Rising Stocks.
“Quality of the results is weak with overproduction and high R&D capitalisation”
BMW reported solid looking profits in the third quarter, but as the dust settled some investors were less than impressed.
Morgan Stanley reckoned the results were lower quality than it expected.
Berenberg Bank agreed.
“Strong headline Q3 results are not as good as they initially look as quality is relatively low due to over-production of 50,000 units and probably filling up of dealer pipeline with new 7-series and X-1 vehicles, and high capitalising of R&D,” said Berenberg Bank analyst Adam Hull.
EBIT (earnings before interest and tax) rose 4.3 per cent in the quarter to €2.35 billion compared with the same period last year. The consensus of forecasts had predicted a 6.3 per cent drop.
The automotive profit margin slipped to 9.1 per cent from 9.4 per cent. This compared with 10.5 per cent at Mercedes, and 8.0 per cent at Audi.
BMW said it still expects full year profits to be in the eight to 10 per cent long range target, compared with 9.6 per cent in 2014.
Long-term BMW cheer leader Evercore ISI was happy with the profit numbers.
“We believe BMW will reach its 2015 full year earnings targets, which several peer brokers had cited as being at risk over the summer. Consequently, we believe BMW will be in the position to pay a special dividend in May 2016,” said Evercore ISI analyst Arndt Ellinghorst.
Morgan Stanley explained why it wasn’t overly impressed.
“Quality of the results is weak with overproduction and high R&D capitalisation. BMW built 50,000 inventories this quarter, contrasting with a draw down in inventories of 16,000 in Q2 and a smaller build in inventory of 29,000 in Q1 2015. We estimate this helped EBIT by about €500 million. This is overall a lower quality set of numbers with R&D capitalisation at 45 per cent, significantly higher than Q2’s 29.5 per cent,” Morgan Stanley analyst Harald Hendrikse said.
The conclusion for BMW was less aggressive though.
Pressure could ease
“BMW continues to manage margins and earnings through a difficult period for the industry, although the quality of (earnings) is lower than we might have hoped for. We believe margin risks remain on the downside, although pressure could ease somewhat into 2016,”
Berenberg Bank’s Hull reckoned BMW’s profit margin in the current quarter would fall to between eight and 8.5 per cent.
He was less than caustic in his view of BMW’s prospects.
“We view BMW (share price) as inexpensive but insufficiently cheap to justify buying (at current levels). We think the sector concerns of a slowdown in China were overdone and the sector remains fairly good value,” Hull said.