Aug. 1 (Bloomberg) -- Bayerische Motoren Werke AG, the world's largest maker of luxury cars, fell the most in almost six months in Frankfurt trading after abandoning its profit forecast because of falling U.S. sales, the dollar's decline and rising costs for plastics, steel and oil.

BMW fell 1.55 euros, or 5.4 percent, to 27.36 euros in the biggest drop since Feb. 5. Second-quarter net income declined 33 percent to 507 million euros ($789 million) from 753 million euros a year earlier, the Munich-based company said today, missing the median estimate of 703 million euros in a Bloomberg survey. Sales fell 0.9 percent to 14.6 billion euros.

Chief Executive Officer Norbert Reithofer plans to cut production by more than 20,000 vehicles, raise prices and ship cars produced for the U.S. to other markets after sales ``deteriorated sharply over the past weeks.'' His prediction of ``another difficult year'' in 2009 comes seven days after Daimler AG lowered its forecast. Car sales in the U.S., BMW's biggest market, have fallen 10 percent this year as soaring gasoline prices and slowing economic growth hurt consumer spending.

``What's surprising is the size of the cut,'' said Georg Stuerzer, an analyst at UniCredit Markets & Investment Banking in Munich, who recommends investors buy the stock. ``Next year won't become easier due to currency risks and commodity prices.''

`Severe' Forecast

BMW's new earnings target puts them ``at the lower end of the industry,'' Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler, told Bloomberg Television. ``The profit warning is severe.''

Standard & Poor's reduced its outlook on BMW's credit to negative from stable, indicating it may cut the carmaker's credit rating, because of the ``heightened risk'' posed by auto markets' deterioration.

BMW has dropped 35 percent this year and is trading at a five-year low.

The company had forecast higher earnings on eastern European and Asia sales and demand for the X6 crossover and upgrades of the X5 sport-utility vehicles and Mini cars. BMW is now scrapping its forecast for 2008 pretax profit of 3.78 billion euros, spokesman Marc Hassinger said in an interview.

The U.S. economy shrank at the end of 2007 and grew less than forecast in the second quarter this year, a government report showed yesterday, as the world's largest economy struggles with declining house prices and gasoline that has climbed to more than $4 a gallon. U.S. banks have been hit with billions of dollars in writedowns of mortgage-related securities, reducing their appetite to issue new loans and drying up funds for growth.

Tightening Lending

Pretax profit at BMW's financial services division dropped 66 percent to 64 million euros. The company said it plans to tighten lending practices at the unit.

Slumping U.S. demand has spilled over into Europe, where deliveries are expected to shrink 2.7 percent in 2008, faster than the 2 percent drop in the first half, the European Automobile Manufacturers Association has said. The situation for carmakers is exacerbated by a 65 percent jump in steel prices and a 69 percent rise in oil over the last 12 months.

In addition, the dollar's 14 percent drop against the euro over the past year is crimping U.S. earnings for BMW and other international carmakers. Nissan Motor Co., Japan's third-largest automaker, reported a steeper-than-expected 43 percent drop in first-quarter profit burdened by the weak dollar and a drop in resale value of vehicles on lease.

U.S. Strategy

Reithofer said the company expects to reduce supply to the U.S. market by 40,000 vehicles, roughly 11 percent of North American sales in 2007, by shipping cars to other markets and halting production. It also plans to raise prices in the U.S.

BMW expects a return on sales of at least 4 percent this year and an operating profit margin, or sales as a percentage of profit before interest and taxes, of 4 percent or higher in the automobile division, the company said in a statement. The company's pretax profit margin was 6.9 percent in 2007.

The new target implies pretax profit of at least 3.1 billion euros, or 18 percent below the previous forecast, Adam Jonas, a London-based analyst with Morgan Stanley said in a note.

``BMW remains a healthy company that is going through a difficult time,'' said Jonas, who has an ``overweight'' rating on the stock. He said losses for BMW in the coming quarters couldn't be rule out.

``Rising oil and raw material prices, the weakness of the U.S. dollar, the impact of the international financial crisis and a weaker U.S. economy have made business conditions significantly more difficult,'' the company said.

3-Series, Mini

BMW has added almost 14.5 billion euros to annual revenue since 2003 by introducing new versions of mainstays like the 3- Series sedan, expanding its lineup of SUVs and adding the 1- series compact. With fuel prices soaring, consumers are opting for smaller, less profitable cars, prompting BMW to cancel plans to build the X7 SUV, Reithofer said. Sales of BMW's Mini brand rose 13.5 percent in the second quarter, while the main BMW brand edged up 2.3 percent.

BMW more than doubled risk provisions to account for bad debt and lower resale values of leased vehicles to 695 million euros in the second quarter from 236 million euros. Expenses for job cuts amounted to 107 million euros in the first six months.

European used car markets are beginning to show similar signs of weakness as the U.S., Chief Financial Officer Michael Ganal said on a conference call with journalists. He said the company would take additional provisions if markets continue to sink.

CEO Reithofer has a program in place to cut spending by 6 billion euros, including the elimination of 8,100 jobs, to help increase its return on sales in automaking to 8 percent and 10 percent by 2012 from 6 percent in 2007. BMW said it has cut about 4,000 temporary jobs and 1,500 permanent staff since September 2007. BMW expects higher expenses for job cuts in the second half.

To contact the reporter on this story: Chris Reiter in Berlin at creiter2@bloomberg.net

Last Updated: August 1, 2008 12:49 EDT