Nuggets Found In BMW Numbers After Initial Depression

BMW lost money in 2008’s fourth quarter, but investors turned surprisingly bullish about the German luxury car maker’s prospects after they’d put the numbers under the microscope.

“The earnings looked disastrous at first glance,” said Commerzbank analyst Daniel Schwarz.

Indeed they did.

BMW didn’t breakout the fourth quarter net income figures, but the Wall Street Journal got out its calculators. According to the WSJ, BMW lost a net €962 million in the fourth quarter compared with net income of €991 million in the same period of 2007.

Revenues fell 18 per cent to €15.6 billion, as car sales dived 30 per cent. BMW also wrote off €1.13 billion in the quarter, making €1.97 billion for the year, mostly from higher than expected provisions for residual values of used cars. For the full year, net profit fell to €330 million from €3.13 billion in 2007.

As this news broke, BMW’s share price took a pounding, but when details of the numbers were examined, sentiment turned around, mainly because of the speed the company handled its production cutbacks, managing to keep ahead of the fall in sales.

“At first glance, the numbers looked worse than they are,” said Schwarz.

“BMW reported a slightly negative free cash flow for the automotive business of minus €81 million. This is a positive surprise; BMW is the only manufacturer that did not burn substantial amounts of cash in the fourth quarter. Net liquidity increased to €9 billion, providing a strong balance sheet,” he said.

€9 billion cash
UniCredit’s Georg Stuerzer agreed.

“After taking a closer look at the key 2008 figures, BMW showed the expected solid underlying performance in this difficult environment and performed much better than the Western European competitors. Net cash in the auto business increased to €9 billion, which is even higher than the level of VW and marks the highest level in the Western European auto industry and therefore the lowest risk profile from this point of view,” Stuerzer said.

Bernstein Research’s Max Warburton said BMW enters 2009 in uniquely good shape.

Cash-pile stakes
“Europe’s best capitalised automaker? If BMW can convince that it really does have €9 billion of automotive cash and that financial services is not going to need cash/equity infusions, then it will be clear. VW has a similar level of cash but is twice as large a business. BMW’s only rival in the cash-pile stakes is Toyota with about €27 billion of cash and securities, but Toyota is three times as big as BMW in revenues so the two are pretty similar right now in terms of security,” Warburton said.

“We continue to see BMW as the safest place in European autos. While we worry about long-term returns and limited peak earnings power, and worry about financial services losses, near-term it continues to look best positioned to remain very liquid,” he said.

Adam Jonas of Morgan Stanley picked up on Warburton’s reference to the question “does BMW really have €9 billion” by saying the key feature of the company’s financial statement was the change in how it accounts for net liquidity in the auto division.

“Change of net cash definition makes it more difficult for us to analyse BMW’s financial position,” he said, in a research note entitled “BMW- Cash Position Unclear”.

Cautious corner
Nomura International’s Dorothee Hellmuth thought BMW’s results were slightly better than expected and praised the company for managing its cash well. But she joined Jonas in the cautious corner.

“The majority of the fourth quarter’s very substantial one-off charges stem from falling residuals and rising defaults. This reflects BMW’s aggressive sales policy via leasing and financing over the past few years. We believe the penetration rate of financial services has increased from 35 per cent in 2000 to 48.5 per cent 2008, reaching over 50 per cent in the fourth quarter,” Hellmuth said.

This raises two questions, she said.

·      “How many more one offs (charges) will BMW need to take in the coming quarters? There is some sign of residual values stabilising, but this may be reflective of limited supply rather than a recovery in demand. Simultaneously default rates continue to climb.

·      How far can BMW continue to rely on its own financing for half its vehicle sales? Perhaps the number of potential BMW customers and hence sales volume is simply smaller than today.”