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BMW Weathers The Storm And Looks Poised For Growth


Surprising Strength Of U.S. Will Be Major Plus
Model Line-up Said Superior To Mercedes, Equal of Audi, Porsche

BMW has come out fighting from its bunker where it was sheltering as the recession storm passed overhead, and investment banks don’t seem to need much convincing that the worst is over.

Deutsche Bank said BMW executives in various recent speeches have made it clear that it wasn’t backing down from its ambitious long-term plan to raise sales and profit, had ruled out a capital tie-up with a volume automaker, and played down the need for much cooperation with Daimler.

Deutsche Bank’ analyst Gaetan Toulemonde was restrained in his latest thoughts on BMW, reckoning its pricing power will be weakened because its share of the global premium market is coming under pressure, and its sales target of between 1.6 million to 1.7 million by 2012 from a likely 1.22 million in 2009 is very aggressive.

“The global premium car market will likely drop to around 5 million in the current year from 5.8 million in 2008 and BMW holds about 25 per cent share of the global premium industry. Premium car sales would thus need to either quickly exceed pre-crisis levels and/or BMW would need to record significant share gains – both are not conservative assumptions,” Toulemonde said.

Toulemonde said BMW’s new product momentum will accelerate but unlike the 2001-2005 period, which included new 1, 3, and 5 series, most products replace existing models and do not cover new segments.

Happy days
Morgan Stanley has few doubts, thinks BMW’s well documented problems have been addressed, and happy days are here again for investors.

(BMW reported 2009 second quarter earnings before interest and taxes of €169 million, compared with €425 million in the same period of 2008, but the purely auto business suffered a loss of €31 million compared with a profit of €395 million. The company declined to forecast profit for 2009, but reiterated its plans at the time to achieve a profit margin of between 8 and 10 per cent on its cars by 2012.)

Morgan Stanley analyst Adam Jonas was a doubter on BMW’s prospects, but not any more.

“Our previous stance was based on a BMW business model jeopardised by deteriorating credit, collapsing used-car fundamentals and regulatory pressures forcing consumers to trade down from the premium car segment. While these risks remain, we are now convinced they have been sufficiently addressed through improvements in the end markets and changes to BMW’s strategy,” Jonas said.

Jonas said BMW’s exposure to the U.S. market is now a big plus, because this biggest market for the company is poised to rebound far faster than investors expect.

“The U.S. market is ready for a big bounce in 2010. We expect U.S. automobile sales to bottom at 11 million in 2009, recovering to 12.9 million in 2010 and (reach) 14.6 million in 2011,” he said.

In a report, Jonas addresses key questions which have clouded BMW’s future –

·      Have risks facing the financing subsidiary been sorted? – Yes – finance has improved dramatically, not least because of an increase in used car prices, but there is still work to do

·      Is BMW’s business model sustainable – No, but BMW is changing by embracing the environment. “We think BMW has a 2 to 3 year technological lead over Mercedes in terms of emissions. This should widen.”

·      Will the U.S. market surprise positively? – Yes – we see the U.S. car market up 17 per cent in 2010, twice the accepted consensus rate for improvement.

·      How does BMW’s line-up compare with German peers? – Better than Mercedes, competitive with Audi and Porsche. BMW launches the new X1 and 5-Series GT in Frankfurt, followed by the new X3 and 5-Series in Geneva. Mercedes has the new E-class, then hits a 2-year drought.

Bank of America Merrill Lynch likes BMW so much it sounds more like an emotional teenager than an investment bank.

“We have loved BMW for a long time. BMW has many qualities unmatched in the European, and maybe global auto sector,” it said in a report.

Merrill Lynch has a list too.

“(BMW has) a clarity of brand and purpose unmatched by any premium brand. An unmatched understanding of its market position and customer needs. A knack for anticipating customer needs and wishes in model design and concept. Leading to unmatched long-term sales growth and market share gains,” said Merrill Lynch.

Avoiding the lion
Peter Cooke, professor of Automotive Management at Britain’s University of Buckingham, has no investment axe to grind, and he’s impressed with BMW too.

“BMW is I think playing a clever game. It is putting a lot of marketing effort into its smaller cars; they are showing improved CO2 already and the range is widening. It is bringing down the size of its products, packing more into the smaller bodies. If the world is driving slower, they will still be among the faster ones. If a group of explorers are being chased by a lion, you do not need to be the first to safety, merely not the last is what counts,” said Cooke.

Neil Winton – September 15, 2009

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