New BMW 5 Series Will Maintain Profit, But Don’t Expect More.
“What’s in store for 2017? Flat margins from what we can see”
BMW’s new 5 series goes on sale in February and while investors reckon it will help maintain profits they worry that the styling doesn’t turn heads, while the competition has raised its game too.
The BMW 5 Series is the company’s second biggest seller after the smaller 3 Series. BMW shares were under pressure earlier this year, sliding from January’s €95 to around €65 in July, but it is now closing in on €90 again.
BMW’s strong profitability doesn’t seem to be under threat, and the long-term forecast of margins between 8 and 10% remains intact.
Berenberg Bank said better model momentum should offset some sales weakness and help BMW stay within the margin target. Its biggest markets won’t be much help though.
“We estimate that 80 per cent of BMW’s profit is generated in markets that we see at peak or close to peak – Europe, U.S. and China,” the bank said in a report.
Citi Research analyst Michael Tyndall said despite the positive case for BMW because its product cycle is about to benefit from a slew of new cars, the previous successful 5 Series will be hard to beat in terms of sales. And because of BMW’s huge success in the past it will hard to actually improve the bottom line.
“What’s in store for 2017? Flat margins from what we can see,” Tyndall said.
Sneak peak
BMW has also been allowing sneak peaks at future models.
“From a subjective perspective the new products seem a little ‘safe’ to us in terms of styling, but that’s not the main issue. The bigger problem in the next year is we see limited scope for either top line growth or margin expansion. BMW doesn’t deny growth prospects are limited, but they would argue it’s the same for their peers,” Tyndall said.
Citi Research has a “sell” position on BMW stock.
Investment researcher Evercore ISI expects flat profits overall next year.
Commerzbank, with a “hold” recommendation, pointed to tough competition from the Mercedes E class launched earlier, and the upcoming new Audi A6. You can add to that the Jaguar XF, Cadillac CTS, Volvo S90 and Lexus GS.
“We believe BMW will have a challenging earnings situation in 2017, particularly in the first half. Rising R&D spending will weigh on earnings while competitive pressure remains high,” said Commerzbank analyst Sascha Gommel.
Barclays Equity Research says the BMW stock is its Top Pick and reckons the company can achieve earnings growth despite pressures from R&D spending, saying the company is on top of electrification and autonomous car development. 2017 should also be helped by the X1 SUV’s first full year of sales, the new Mini Countryman and new X2. In March there will also be a BMW 5 Series plug-in hybrid and later in the year a Touring station-wagon and a GT version.
Barclays agreed that BMW’s line-up of new vehicles isn’t as impressive as Mercedes’, but the future looks good for profits.
Not transformative
“We would concede that the near-term (model) pipeline is not “transformative” in the manner of design change that Mercedes has managed in recent years, but given the growth it has managed when in the toughest spot in its product cycle, we are confident that it will be well received by consumers. With the 5 Series the most profitable model for BMW, and a number of SUVs to follow, we think there is an opportunity for earnings growth in 2017/18 which is not factored in by consensus,” said Barclays Equity Research analyst Kristina Church.
In this year’s 3rd quarter BMW’s auto profit margin fell to 8.5 per cent from 9.1 per cent in the same period last year. BMW said profit and sales will rise slightly for the whole year. For the latest quarter BMW said demand for SUVs boosted sales in Europe and China, compensating for weakness in the U.S. In October, BMW’s U.S. sales fell almost 20 per cent to just over 24,000.
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