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Turnaround Expected For BMW As New Models Loom

2012 Profit Target Seen as Overambitious

Investors reckon the worst is over for BMW, and the future looks good based on a slew of new car launches over the next couple of years.

BMW reported second quarter earnings before interest and taxes of €169 million, compared with €425 million in the same period of 2008, but the purely auto business suffered a loss of €31 million compared with a profit of €395 million. The company declined to forecast profit for 2009, but reiterated its plans to achieve a profit margin of between 8 and 10 per cent on its cars by 2012.

Despite these gloomy second quarter figures, some investors are in sunlit uplands mode.

“BMW is the auto assembler about whose profit progression we feel most confident on a multi-year view, through a combination of self-help and the stabilisation of markets,” said Citigroup Global Markets analyst John Lawson.

UniCredit’s Georg Stuerzer agreed.

“BMW’s results confirmed once again that the company is handling the current crisis much better than most of its peers,” Stuerzer said.

Upcoming launches bode well for BMW, according to Citigroup’s Lawson.

Critical path
“We see BMW on a critical path where the sequence of “5”, “1”, and “3” series product launches from the second quarter of 2010 until the first quarter of 2012 release the bulk of the claimed €4 billion material savings embedded in the Strategy Number One,” said Lawson.

BMW launched its Number One strategy in 2007, which listed aims for the company through 2020 which included increasing profitability, shareholder value and cost savings.

“Market share potential is strong owing to BMW’s CO2 credentials,” said Lawson, who said BMW had weathered a 15 to 20 per cent drop in sales with relatively little damage.

Lawson said BMW’s new engineering methods for the next generation of vehicles will begin to show results in 2010, although he doubted BMW’s ability to reach the 8 and 10 per cent margin on its cars by 2012.

Strong potential
“On our view to 2011, with Group sales still estimated at 1.5 million, we can see Group EBIT margins reaching high in the 5 per cent range, still trailing a 6.2 per cent average historical rate in the decade to date, but with further, possibly quite strong, potential into 2012,” Lawson said.

Lawson sees sustainable margins of around 6 per cent.

Investors sympathised with BMW’s reluctance to offer more specific targets for 2009, but hoped more information might be forthcoming at next month’s Frankfurt Car Show.

Bernstein Research’s Max Warburton said BMW’s financial performance up to and through the recession had been impressive, but he wondered if a return to the good profit times might be threatened by changing fashion and tighter CO2 regulation.

“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,” Warburton said.

UniCredit’s Stuerzer doesn’t agree.

“The basic investment case (for BMW), which is a combination of cost cutting and new model offensive, is still intact and should result in clearly higher earnings and margins from 2010 onwards,” Stuerzer said.

Neil Winton – August 15, 2009

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