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Investors Worry BMW Past Peak After Profit Falls, Margin Lag

Investors Worry BMW Past Peak After Profit Falls, Margin Lag.

“BMW was the future once”

BMW has been overtaken in the profitability race by rivals Audi and Mercedes, and investors worry this may be a long term trend.

BMW’s third quarter results provoked negative comments like “you were the future once”, and “the absence of growth remains our number 1 bugbear”.

BMW reported third quarter profits fell 5.9 per cent to €2.42 billion compared with the same period of 2016. Earnings before interest and tax (EBIT) slipped 3.2 per cent to €2.3 billion. The operating profit margin dipped to 8.3 per cent from 8.5 per cent a year earlier, just within its 8 to 10 per cent long range target. Meanwhile Audi recently reported an 8.9 per cent margin and Mercedes 9.2 per cent.

Bernstein Research analyst Max Warburton said BMW’s latest results with the lower profit margin showed BMW had seen better days.

“It won’t change the common view that BMW is past its peak. BMW was the future once. It was bold, brave and brilliant – with a brand and with product that outshone the others. It built the fastest cars, with the best dynamics (M3/M5), came up with boldest new ideas (X5/X6), took the bravest decisions (electric i3) had the cleanest brand promise and the best growth and margins. Now it makes the 2-series Active Tourer – a minivan,” Warburton said.

Citi Research wasn’t overly impressed either.

Bugbear number 1
“The absence of growth remains our number 1 bugbear. There are elements of BMW’s results that are positive – free cash flow was strong and 2017 pre-tax (profit) guidance was upgraded. However the main story for us is Q3 revenues were flat and pre-tax profits fell 6 per cent year on year. The Auto margin of 8.3 per cent was towards the bottom end of the guided range and the lowest of German premium brands,” Citi Research analyst Michael Tyndall said.

“Maybe it is too early to see the product cycle boost, but our fear is the new 5 series is not working in the face of tough competition. That worries us in terms of the prospects for the raft of new product coming and how BMW might react in spending/pricing,” Tyndall said.

Tyndall retains his “sell” recommendation for the shares.

Investment researcher Evercore ISI said the latest results won’t help turn around the stock price, which it said was the worst performing western manufacturer this year.

“The stock will remain out of favour given a lack of excitement surrounding BMW’s product offering design, the lack of near term fresh EV (electric vehicle) product and more value upside from peer companies SOTP (sum of the parts) valuations,” said Evercore ISI analyst Arndt Ellinghorst.

BMW is planning to launch a new 8-series coupe and X7 large SUV, while the new X3 SUV goes on sale this month.


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