BMW Shares Take A Hit As Profit Prospects Deteriorate.
Apparent Progress In China-U.S. Trade Talks Is A Positive.
“We forecast a 7.4 per cent auto EBIT margin in 2019”
BMW’s share price has dived almost 30% this year as its profit prospects worsened, but in recent days there was some signs of revival as hopes rose that the U.S. and China would avoid a trade war.
For years, BMW has proudly stuck to its forecast that profits will continue in the impressive band of between and 8 and 10 per cent. But a profit warning in September, followed by a profit fall in the 3rd quarter has spooked investors.
BMW is not alone in finding itself facing massive spending for future products like autonomous and electric cars which require cash today, but with an unknown pay-back date. Traditional markets are also facing tumultuous times
BMW, including its Mini and Rolls Royce brands, reported a 27 per cent drop in third quarter operating profit to €1.75 billion compared with the same period of 2017. BMW cited higher raw material prices, currency effects, higher costs of warranties, the tariff aggravation between China and the U.S., and a price war in Europe for the fall.
The automotive profit margin fell to 4.4 per cent from 8.6 per cent a year ago.
In late September, BMW cut its profit forecast for 2018, saying its automotive EBIT (earnings before interest and tax) will fall to at least 7%, compared with the previous forecast of between 8 and 10%.
BMW hasn’t officially conceded yet that profits in 2019 will fail to reach at least eight per cent, but investors are preparing themselves.
In a presentation to investors in Munich, BMW spelled out its fears.
“Our strategic profitability target of between eight and 10 per cent remains unchanged. Whether we achieve this in 2019 will depend on many different factors,” said Chief Financial Officer Nicolas Peter.
After the presentation BMW shares continued to fall, but revived a bit from the low of €69.64 euros to about €75 towards the middle of December, according to Reuter’s data.
Investment bank UBS, after attending the presentation, quoted Peter as saying the 8 to 10 per cent target for 2019 was “challenging” because of factors including higher research and development amortisation, the expense of complying with tougher CO2 emissions laws, higher foreign exchange and commodity price headwinds.
BMW remains optimistic on sales volumes and price mix with new models due next year, although the numbers would look better if a tariff war was avoided between the U.S. and China and there was a Brexit deal. The UBS report was written before news of an apparent lull in the tariff wars between the U.S. and China.
By the second half of next year BMW’s new product – the X5, X7, 8 Series, 3 Series and Z4 – will be fully available.
“We forecast a 7.4 per cent auto EBIT margin in 2019,” UBS analyst Patrick Hummel said.
Citi Research said the meeting provided details of BMW product, technology and production plans.
“Overall, we believe that the management strategy is clear, although we remain concerned that there are significant earnings risks implied by the prodigious challenges that the industry faces over the coming years,” Citi Research analyst Raghav Gupta-Chaudhary said.
BMW said the recent problems generated by new fuel economy rules had hurt the company, which although well prepared for the transition was caught up in the price war that followed other companies failure to comply.
European carmakers have been struggling to meet new European Union rules on fuel efficiency which came into force on September 1. Sales boomed in August as manufacturers sought to sell off vehicles that wouldn’t meet the new rules. Sales have subsequently been on a roller coaster and should return to normal by year end.