JLR Returns To Stability But Big Problems Loom.
“After the last few quarters of earnings volatility we suspect investors will welcome the lack of drama”
Jaguar Land Rover (JLR) has been making investors nervous with surprise news from its financial statements, but the latest news was more reassuring.
“Dull will do just fine,” said Bernstein Research analyst Robin Zhu.
JLR profit before tax fell 25 per cent to £192 million (€216 million) in the 3rd quarter ended December 31 compared with the same period of 2016 as sales growth slowed to 3.5 per cent because of weak markets in the U.S. and Europe. The profit margin in the latest period was 2.6 per cent compared with 3.9 per cent last year.
The newly introduced Range Rover Velar was well received, while Evoque and Sport sales declined. This year sales will be boosted by the new E-Pace compact SUV and the all-electric I-Pace.
British demand has also been hit by uncertainty over Brexit and the diesel controversy. According to IHS Markit, over 90 per cent of JLR’s sales last year were diesel.
JLR lacks many enthusiastic investors, who worry about the threat from the German premium manufacturers.
Last year, the British based subsidiary of Tata Motors of India spooked investors with a surprise dip in profitability as its ambitious SUV programme took a toll on the bottom line.
“After the last few quarters of earnings volatility we suspect investors will welcome the lack of drama,” Zhu said.
Zhu said margins will be helped this year by the Velar.
“On the other hand, the new E-Pace will be lower margin, broader cyclical concerns remain and electrification could represent a growing drag on JLR margins. Many investors we know have given up on Tata now, and it’s not hard to understand why. But at what point do we reach the point of maximum bearishness,” Zhu said.
Investment researcher Evercore ISI wasn’t much more enthusiastic and worried about JLR’s inability to compete on scale, while massive investment requirements loom.
“We understand that JLR is going though a phase of very expensive expansion and corresponding higher investment – total R&D and capex is 17 per cent of sales. However, this is also reflects ‘stretch’ of the business model related to limited economies of scale. The problem will unlikely go away at times when the industry is moving into electrification and autonomous, both of which make scale an even more important parameter,” said Evercore ISI analyst Arndt Ellinghorst.