BMW Profit Rises 1% as Weak U.S. Sales Weigh on Results

By Markets Fool.com

Tight supplies of the BMW X5 SUV have held back the brand's U.S. sales this year. Image source: BMW.

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German luxury-car makerBayerische Motoren Werke Aktiengesellschaft (NASDAQOTH: BAMXF) -- better known as BMW -- reported on Nov. 4 that its third-quarter pre-tax profit rose 1.1% from a year ago, but earnings in its core automotive division fell 3.9% due to higher costs and a decline in sales in the important U.S. market.

BMW earnings: The key numbers

Metric Q3 2016 Q3 2015 Change
Revenue 23,362 million euros 22,345million euros 4.6%
Units sold: autos 583,499 545,062 7.1%
Units sold: motorcycles 35,290 33,993 3.8%
Earnings before interest and tax (EBIT) 2,380million euros 2,354million euros 1.1%
EBIT profit margin, auto segment 8.5% 9.1% (0.6%)
Net profit 1,821million euros 1,579million euros 15.3%
Operating cash flow, auto segment 2,369million euros 2,246million euros 5.5%

Data source: BMW. 1 euro = $1.11 on Nov. 4.

What happened at BMW during the third quarter?

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As noted above, while BMW's overall EBIT profit rose 1.1%, EBIT in its automotive unit -- where 92% of its revenue was generated in the quarter -- fell 3.9% to 1.8 billion euros ($2 billion). Increased costs were a factor: Not only has BMW boosted its spending on electric drivetrains and advanced driver-assist systems (ADAS), it also reported higher labor costs and expenses related to changes to its regional sales mix.

What's that about? BMW underestimated the shift in consumer demand away from sedans and toward SUVs, particularly in the highly profitable U.S. market. It has had to scramble somewhat to increase production of crossover SUV models for North America in hopes of recovering from a sales decline. It hasn't yet: Through September, BMW's U.S. sales were down 8.7% from a year ago. That was also a factor in the year-over-year decline in EBIT.

That said, the struggles that BMW's automotive unit has had in the U.S. have been offset by growth elsewhere in the world. Through September, BMW's auto sales in Europe and China were up 10% and 11%, respectively.

BMW Motorrad, the company's motorcycle unit, posted a 3.8% increase in global sales in the third quarter. But its EBIT fell 30.4% from a year ago to 32 million euros, on costs related to new product-development and unfavorable exchange-rate swings.

BMW Financial Services, the company's in-house financing arm, earned 576 million euros on an EBIT basis, up 23.9% from a year ago. Its financing and leasing businesses both grew well, with total contracts up 11.2% from a year ago.

What BMW's CEO said about the quarter

In a statement accompanying BMW's earnings report, CEO Harald Krueger emphasized that the company's steady profitability is helping to finance its transition to electric drivetrains.

We posted new record earnings and continued to grow profitably -- thereby maintaining a strong basis for the consistent implementation of our strategy. We are already achieving measurable success in the areas in which the entire sector is judged, namely our successful electrification strategy, with more than 100,000 electric vehicles on the roads already today, and our consistent achievement of high profitability, which enables us to finance future investments from our own resources.

BMW i has always stood for a great deal more than alternative powertrains: BMW i is our "spearhead of innovation," ensuring that the BMW Group maintains its pioneering technological role. We have already proved this in the field of electric mobility -- and we continue to write our own success story in the fields of automated driving and digitalization.

We are absolutely convinced that the mobility of tomorrow is sustainable. Years ago, we announced our unambiguous commitment to electric mobility and achieved technological leadership in this field. Growing customer demand confirms that we are on the right track and that now is the right time to take the next steps.

Krueger alsorevealed that BMW will launch an all-electric Mini in 2019 and a battery-electric version of its X3 SUV in 2020.

Looking ahead

In a statement, CFO Friedrich Eichiner confirmed BMW's full-year guidance. (Author's emphasis added.)

Costs generally rise toward the end of the year, so we expect this to have a dampening effect on earnings. Capital expenditure will also be higher in the last three months of the year, mainly due to the start of production and ramp-up of the new BMW 5 Series. The BMW Group is focusing on its ambitious targets for the year. Assuming conditions remain stable, we can confirm our guidance from the beginning of the year.

  • The BMW Group expects to see a slight increase in pre-tax earnings for the full year.
  • The Automotive Segment is targeting slight increases in both revenues and deliveries.
  • We intend to keep the EBIT margin for the Automotive Segment within our target range of 8%-10%.
  • For BMW Motorrad, we forecast a solid increase and a new all-time high in retail sales for the full year 2016.
  • In the Financial Services Segment, we expect return on equity to remain at last year's level -- and therefore above our target of at least 18%.

Depending on the political and economic situation, actual business performance could, however, differ from current expectations.

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John Rosevear has no position in any stocks mentioned. The Motley Fool recommends BMW. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.