More Of The Black Stuff Expected For BMW In 2011

BMW reported powerful profit progress in 2010, mainly thanks to China and to a lesser extent the revival in the U.S. market, and investors expect more of the same in 2011.

BMW’s net income raced ahead to €3.23 billion in 2010 compared with 2009’s meagre €210 million, and easily beat the average analysts’ prediction of €2.91 billion. The company said sales of the new 5-Series increased 36 per cent in China and the U.S. combined.

The auto EBIT profit margin was an impressive-sounding eight per cent, but BMW was third best in the German premium profit race behind Mercedes’ 8.7 per cent and Audi’s 9.4 per cent.

Bank of America Merrill Lynch said BMW remains its favourite German automotive investment, and it expects the profit margin to improve to 8.8 per cent in 2011. BMW has been forecasting a long-term profit margin target of between eight and 10 per cent for 2012.

“Given building inflationary pressures both internal for materials and external gasoline costs, it is prudent to bake in some headwinds compared with the second half’s 9.9 per cent margin, but it appears to us these pressures may already be factored into 2011 estimates,” said Merrill Lynch auto analyst Fraser Hill.

One year early
Deutsche Bank thought BMW’s profit margin could be even higher than Merrill Lynch’s 8.8 per cent estimate, saying it agreed with BMW’s latest projection that the eight to ten per cent margin was possible one year earlier in 2011.

Even as the German premium manufacturers report impressive earnings for 2010, some investors seem some cause for concern.   Can they maintain huge profits from China? Will government regulations in Europe and the U.S., which seek to raise fuel efficiency, sabotage the premium sector’s business plan which has relied on huge profit margins from gas guzzling, hugely expensive sports cars?

Demand for BMW’s new 5-series in Europe is said to be almost entirely for two litre diesel versions with razor thin profit margins. Will the industry’s finances be crippled by the research costs for battery and hybrid cars? Another worrying factor is that BMW’s factory capacity use is approaching capacity.

Bernstein Research auto analyst Max Warburton said BMW’s profitability in 2010 exceeded analyst’s initial estimates, and those of the company. 2011 shouldn’t see more progress, but China is key.

“We believe China is the single biggest driver of this surprise although the company argues pricing and cost cutting have both exceeded their original hopes. Looking further into 2011, we expect some profit improvement. The bull case rests on Chinese profitability holding, or growing further, while mature markets recover,” Warburton said.