Some Investors Say The Worst Is Over.
Others See Dangerous Complacency In The Face Of Weak Markets.
“We doubt BMW can recover to historic margins”.
BMW, as expected, lost money in the first quarter, but some investors say the worst is over and applaud the company for its handling of the recession, while critics say BMW is being complacent, and can’t hope to ever regain the glory days of fat margins and relentlessly increasing sales.
Let’s start with the nay-sayers.
Max Warburton, analyst with Bernstein Research, said he is concerned BMW is not past the worst in the sales cycle, while the prospects for its high profit cars look bleak.
“We doubt BMW can recover to historic margins, even with the U.S. dollar rate that is better than in recent years. We stress again that BMW makes all its profits from the top 15 per cent of mix. Engine size drives earnings and the days of selling large quantities of M3s, 335is, 550is and X5s look to be over. BMW cannot make strong margins selling Minis and 118ds. While BMW has the strongest balance sheet and best ability to preserve capital in the sector, making it a likely safer position in the event of a further deterioration of the economy, it simply doesn’t have the margin and earnings upside to go much higher (on the stock market) in our view,” Warburton said.
The charge of complacency comes from Nomura International analyst Dorothee Hellmuth, who absolves rival Mercedes from the accusation.
“BMW still believes it can achieve sales of between 1.6 million and 1.7 million in 2012. As far as we know that view remains unchanged. Furthermore, BMW appears to regard its ONE restructuring plan and ongoing efficiency gains as sufficient to see it through the current crisis. Much hope seems to rest on the renewal of the 1, 3 and 5 series line-up between 2010 and 2012,” Hellmuth said.
She said this is in contrast to competitors like Mercedes, who is raising its restructuring efforts and abandoned all longer-term plans set before the crisis. Hellmuth pointed to reported remarks from Mercedes CEO Dieter Zetsche saying the U.S. market would take 4 to 5 years to recover to pre-crisis levels, while BMW North America VEO Jim O’Donnell was said to anticipate solid growth from the fourth quarter of 2009.
Hellmuth was impressed with BMW’s first quarter numbers (it lost €55 million before interest and taxes; Mercedes lost €1.1 billion in the quarter), although she worried about the company’s increasing exposure to financing, not just for new sales, but also for second-hand vehicles.
“This strategy is only sustainable if there is a genuine underlying recovery in residuals, if defaults decline and financing costs return to normal,” she said.
Deutsche Bank was impressed with BMW’s action to reduce stocks, but when it looked under the hood of the results it found what it called a “hefty” €560 million provision which helped to boost automotive profitability. Morgan Stanley said BMW had lost much less than it expected, but called the figures surprisingly strong but “unsustainable”.
Commerzbank had no such reservations.
“It is hard to see why Q1 should not be the low point: residual values are stabilising, €500 million lower cost of personnel become effective in the first half and lower raw material prices are pouring into the P&L with a time delay. Even with no market improvement coming quarters should improve sequentially,” said Commerzbank Equity Research analyst Daniel Schwarz.
UniCredit analyst Sven Kreitmair applauded from the sidelines and said everything is coming up roses.
“We believe that BMW has responded adequately to the current market scenario with its strategy to improve cash flow and profitability as well as to adjust its premium product portfolio strategy to the new trends with environmentally friendly drive systems and production processes, with smaller and highly efficient cars. In addition its efficient dynamics technology will enable BMW to meet the new EU emission performance requirements for 2012 and 2015,” Kreitmair said.
Deutsche Bank was having none of this rose-tinted vision.
“We remind investors that the company was loss-making – and this is unlikely to change for the full year 2009. Nevertheless, we wonder how conservative BMW’s expectations for the coming years really are, as management presses ahead with capacity increases and gives little impression to think about downsizing the business,” Deutsche Bank analyst Gaetan Toulemonde said.
Neil Winton – May 12, 2009