BMW AG (BMW.XE), the German luxury car maker, reported Thursday a 27% increase in pretax earnings in the first quarter of 2017 on the back of one-off financial gains and strong earnings in China, but investment in technology and new models hit profitability of the company's core automotive division.
The mixed report came after repeated warnings from BMW regarding weaker margins, as the company invests in new models and technology to build self-driving electric cars. The company is in a tight race with Daimler AG's Mercedes-Benz brand for sales leadership in the premium car market and lost the crown to Mercedes in 2016.
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BMW's earnings before interest and taxes jumped to 3.01 billion euros ($3.23 billion) in the first three months of 2017, up from EUR2.37 billion a year earlier. This was driven by strong sales of its new 5-Series sedan, higher gains from its China joint venture and the sale of a 15% stake in digital map-maker, Here, to Intel Corp.
The result beat analysts' forecasts. Shares in BMW initially jumped 1.3% in Frankfurt, but quickly fell back on profit taking to trade at around EUR83.77, barely higher than the opening price.
Group revenues rose 12% to EUR23.45 billion from EUR20.85 billion a year earlier. The pretax profit margin in BMW's core automotive business slipped to 9% from 9.4% a year before.
Analysts shrugged off the decline in profitability, saying the fall was less than expected given the huge cost of financing new technology and models as BMW rushes to shift its product mix to meet the rising demand for sport utility vehicles.
"This is a good achievement, even though the margin was down," Arndt Ellinghorst, an automotive analyst at Evercore ISI, said in a note to clients. "The fact that the margin wasn't higher is largely related to increased R&D expenditure, which was very low last year."
BMW achieved record sales in the first quarter on the back of strong demand for its X1 and X5 SUVs and the first full month of sales of the new 5-Series and its flagship 7-Series sedan.
However, Mercedes is still ahead on sales. BMW branded vehicle sales rose 5.2% to 503,445 vehicles in the first three months of 2017; Mercedes sold 560,625 vehicles in the same period, up 16%.
BMW attributed the sharp rise in pre-tax earnings to financial gains, including the improved valuation of Here after Intel agreed to buy a stake in January. It reported a gain of EUR183 million from its share of the sale of the Here stake.
The company kept its 2017 guidance unchanged, saying it expected a slight increase in profit in 2017, with a margin for earnings before interest and taxes of 8% to 10% in its core automotive operations.
Analysts said BMW might have to raise its profit outlook for 2017.
BMW will publish full results on May 4.
--William Wilkes in Frankfurt contributed to this article.
Write to William Boston at William.Boston@wsj.com
(END) Dow Jones Newswires
April 20, 2017 08:41 ET (12:41 GMT)