BMW leads strong German pack as premium car sales gather pace – The Detroit News
BMW leads the big three German premium car manufacturers in the race to be 2014?s world No. 1 sales performer, but investors are more impressed with long-term profits than shor-tterm success on the forecourt.
Investors don?t care about the egocentric games played by BMW, Mercedes and Volkswagen?s Audi as they boast big sales successes all around the globe, and breast-beat about being the world?s winner in terms of sales. If big sales aren?t accompanied by fat profits, so what?
Investment banks still feel that BMW has the inside track in the only competition that counts, the race to make money. And latest sales figures show BMW is in the lead on this count too.
German success is expected to carry on spurting between now and 2020, with many new sales being stolen from mainstream manufacturers, which find their market for higher margin more expensive cars being attacked from above by the premium makers, and their small cars from below by the Koreans and Japanese.
For the first three months of 2014, BMW outsold second placed Audi by 15,409 vehicles with its 12 percent higher sales of 428,259. Mercedes sales rose 15 percent to 374,276. So you can?t say anyone is doing anything but well. And according to IHS Automotive, overall German sales success is going to accelerate some more by 2020.
?Combined sales volumes of the big three German (premium) manufacturers will rise between now and the end of the decade by 75.8 percent on the back of new model launches and ongoing growth particularly in the BRIC economies of Brazil, Russia, India and China,? said IHS analyst Tim Urquhart in a report.
Urquhart said BMW, Mercedes and Audi won?t be having things all their own way though. Competition from Indian-owned and British-based Jaguar Land Rover, and Fiat Chrysler?s Maserati will ratchet up in the burgeoning SUV segment and also as they move down to attack previously out of bounds segments like smaller cars.
But the Germans will continue to dominate the premium sector, which will rise to 6.12 million vehicles annually by 2020 from 3.49 million now, Urquhart said.
Barclays Equity Research analyst Kristina Church said Mercedes has attracted the attention of investors recently with its new model program, including eye-catchers such as the GLA compact SUV, new S-class limousine and most recently the renewed C-class sedan. Church said in the future, successful auto manufacturers will be ones confronting structural change ? those best meeting the new demands for fuel efficiency ? and the rest.
Despite all this new model activity from Mercedes, which has also shown a much needed improvement in body design, BMW provides a more plausible strategy because of its long-term growth prospects and structural change, Church said. Volkswagen and its Audi subsidiary has also embraced structural change, but has limited potential to make more money. BMW offers both long-term growth and structural change, Church said.
10 BMW ‘i’ models?
?We think (BMW?s) new i-models put them as the brand-innovator in electric technology and that their proprietary carbon-fiber stamping will see BMW leapfrog the competition on the path to 2020 CO2 regulations,? Church said.
BMW?s ?i? models include the recently launched i3 battery electric small car with a high-technology carbon fiber body, and the i8 plug-in hybrid sports car. BMW has said it has patented the ?i? designation for up to 10 vehicles, as part of its plan to meet ever-tighter government rules on fuel consumption.
Church expects BMW?s profit margin to rise to 9.9 percent in 2014, from 9.4 percent in 2013, and notes the progress in the company?s stock price recently.
?We do not think the recent rally (in the stock price) has even begun to incorporate the more optimistic earnings outlook at BMW,? Church said.
Despite Mercedes recent dramatic improvement in styling and great new cars, the company still hasn?t tackled its long-term problem of the high cost of production.
?We believe Mercedes is a long way behind peers in terms of structural change, both with regards to product technology but also in regards to its cost structure,? Church said.
VW and its Audi subsidiary is on target to hit its 2018 target of 10 million annual sales ahead of time, but profitability of this massive conglomerate is less strong.
Just when you thought everybody was in agreement, along comes iconoclast Max Warburton of Bernstein Research. He says it?s time to dump BMW and go for VW if you?re an investor. VW?s profits have been flat for years, it has massive exposure to a recovering European market, its U.S. business has huge scope for turnaround, and its recently acquired Porsche luxury subsidiary is a money-making machine.
Running out of niches
?BMW … has less leverage to a European market recovery and less room for profit improvement. Recent exuberant guidance was a big positive surprise, but the timing seems odd as BMW will soon run out of new segments to push into. Can anyone think of a niche or model number not already targeted?? Warburton said.
BMW last month excited investors with what was described as an ?exuberant? profit prediction. Some raised doubts after digesting the latest forecast, wondering if its out-of-character brashness was explained by new government regulations insisting on clarity, while others worried about a looming hit from foreign exchange losses.
?We expect group profit before tax to rise significantly in the current year, despite ongoing volatile business conditions,? said CEO Norbert Reithofer at BMW?s annual financial press conference.
This set off a scramble by investors to buy BMW shares. The company must be really going gangbusters for normally reticent, conservative Reithofer to make such an adventurous forecast, went the logic.
After some time for consideration, the reality became a little less impressive. It turned out that BMW was reacting to new German accounting rules which said profit guidance must now show a close correlation to its own internal planning.
Other skeptics pointed out that BMW?s pricing would come under pressure as core but aging products like the 1, 3 and 5 series struggled in the marketplace, despite the positive impact of new but more niche vehicles like the new X5, 2 Series, upcoming 4 Series Grand Coupe, the X4 and M4 convertible.
IHS Auto?s Urquhart said the big three Germans will have captured around 7 percent of the global car market by 2020, up from around 5 percent currently, and this will increasingly be at the cost of mass car makers.
?In Europe, the premium manufacturers have increasingly entered the segments of mainstream rivals. This has meant a smaller share of the pie for mid-market brands and the higher price points that the premium brands can charge mean they are able to maintain decent margins on smaller vehicles. There is no sign that this trend will reverse, especially with models such as the BMW 2-Series Active Tourer introducing the premium brands into segments that 10 or 20 years ago would have been unthinkable,? Urquhart said.
BMW is in the lead of this hard-charging group, agrees Barclays? Church.
?We believe the clear leader in terms of both near-term and long-term earnings momentum is BMW, despite high investment spend. We think the (stock) market is still significantly underestimating the level of long-term (profit) margin and cash expansion as (investment) costs drop off and the technological leadership provided by historical spending drives a considerable reweighting of the business? brand equity,? Church said.