BMW Profit Dips as China Worries Loom

Sales of BMW's X5 SUV rose 26% in the first half of 2015, helping the brand to an overall 5.2% gain. But a slowdown in China could cool sales growth, BMW warned on Tuesday. Source: BMW Group

German automaker BMW Group reported quarterly earnings on Tuesday, Aug. 4. Here's what you need to know.

The key numbersBMW's operating profit fell 3% to 2.53 billion ($2.77 billion) on increased costs and relatively higher sales of less-profitable vehicle types, despite a 20% jump in revenue to 23.9 billion ($26.2 billion). EBIT margin in BMW's automotive segment, a widely watched number, fell to 8.4% from 11.7% a year ago.

Net profit was 1.75 billion ($1.92 billion), down 1% from a year ago.

Shares fell over 2% in early European trading after the news was announced.

Sales increased in key markets, but costs increased, tooDespite the drop in profit, many of BMW's numbers looked quite good. BMW delivered over 573,000 vehicles during the quarter, a 7.5% increase. Sales in long-troubled Europe rose an impressive 9.5%; U.S. sales were up 9.6%. Motorcycle sales rose 11.3% to just over 47,000, an all-time quarterly record for the unit.

Like many of its competitors, BMW is being helped by a global surge in SUV sales. Sales of BMW's X5 and X6 SUVs both rose over 20% in the first half of the year.

Those sales increases -- plus favorable exchange-rate shifts -- helped drive the big increase in revenue. (Revenue would have increased 9.6% without the exchange-rate boost, BMW said.)

But some news was less rosy. Sales in China, long a growth engine for BMW, rose just 2.3%, and the company said that slowing growth in the world's largest auto market could put pressure on its margins in time.

The growth in revenue didn't translate into profit growth because BMW's costs increased. That's an effect of the company's aggressive push to develop new models and advanced technologies. BMW said last year that it would boost spending on new products and technologies in order to keep up with its luxury-market arch-rivals, Daimler's Mercedes-Benz and Volkswagen's Audi.

That spending is now visible. Research and development expenses increased 9.4% over the year-ago quarter, to almost 1.2 billion ($1.31 billion). And headcount is rising: BMW said that its number of employees increased 6.2% during the quarter, and that it is continuing to be aggressive in hiring "engineers and skilled workers."

Reiterated upbeat full-year guidance -- with added caveatsDespite the dip in profit, BMW reiterated its previous upbeat guidance on Tuesday. CFO Friedrich Eichiner promised "new record figures for sales volume" and pretax profit. He confirmed that the company expects the EBIT margin for its automotive business to come in between 8% and 10% for the full year.

But BMW also attached some significant caveats to that guidance.

It said its profit momentum could be slowed by increasing competition, higher personnel costs, and the ongoing need to invest aggressively in future product.

And China looms as a very big concern. "If conditions on the Chinese market become more challenging, we cannot rule out a possible effect" on the full-year forecast for profit margin, the company said in its written earnings report.

The upshot: For the most part, BMW remains on courseConcerns around China put pressure on the stock in the hours after the news was released. But despite the profit dip, BMW continues to look strong, with a solid cash position and a substantial new-product pipeline.

The increased spending will bear watching, as will the situation in China. But on balance, BMW's market-beating growth in Europe and the U.S. bodes well for the rest of 2015.

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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.

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