Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Companies tend to start emphasizing the importance of profits -- as opposed to sales growth -- when one of their competitors is growing faster.

End of the Cycle?
BMW shares have sagged this year amid worries over U.S. car sales and Brexit
Source: Bloomberg

Mercedes-Benz has snatched the crown for the highest sales of luxury cars from BMW this year, thanks to a range of sporty new models. No surprise, therefore, that BMW insists delivering consistent profitability matters most. It has a point.

Daimler (Mercedes-Benz's owner) does seem to have broken its nasty habit of abandoning its profit targets -- but still has work to do to prove it can sustain its recent run of good form.

In contrast, BMW's carmaking operations have achieved an operating profit margin within the company's target range of 8 percent to 10 percent (or more) for 25 consecutive quarters.

In the second quarter, the figure rose to 9.5 percent -- even after the company had to make a 472 million-euro provision for recalling vehicles, including those with faulty airbags made by Japan's Takata. Over at Mercedes-Benz, the comparable figure was 6.4 percent.

Cruise Control
BMW has achieved an impressive level of profit consistency despite volatile car markets
Source: Company reports

Investors should be reassured that Munich-based BMW can deliver this level of profitability while it has both an older line up of models and is funding the development of electric and autonomous vehicles. 

It would a stretch to conclude BMW is no longer a cyclical company. Gadfly remains concerned by its reliance on financing to keep sales moving -- almost half of new vehicle sales are either leased or financed by the company. BMW insists it has made appropriate provisions against the risk of borrowers defaulting and the residual value of vehicles falling.

Still, BMW's relatively balanced mix of sales across different regions helps the automaker iron out difficulties in any individual country, even if maintaining that equilibrium isn't always plain sailing. 

Sharing the Love
BMW has tried to balance its global sales so it's not hit hard by a slowdown in a particular market
Source: BMW

When China car sales slowed last year, BMW tried to sell more cars in the U.S. instead. However BMW's U.S. car sales tumbled 10 percent in the first six months of this year as demand slowed and competition intensified. Consumers are favoring gas-guzzling sports utility vehicles and trucks over regular sedans. A surfeit of the latter has put pressure on pricing. 

Even so, BMW deserves credit for recognizing there was a problem in the U.S. pretty early in the year and taking action to prevent a further build-up of  unsold vehicles on dealers' forecourts. Ford's warning last week about the gloomy outlook for U.S. car sales makes BMW's intervention look prescient. 

BMW shares slipped 2 percent on Tuesday marking a 22 per cent decline so far this year. That seems a harsh verdict considering its enduring earnings track record. The conservative, understated company is never going to win prizes for charisma but, in the current environment, boring will do just fine.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. To be sure, the margin widens to 10 percent if recalls and other legal provisions are excluded.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net