Profits Take a Backseat at BMW

Despite a 38% drop in first-quarter net profit, new CEO Reithofer asserts new products will help the company meet its full-year target

BMW doesn't like to slip. Since it emerged from the Rover debacle in 2000, the company's top executives have delivered six years of steady growth in sales and profit with Teutonic precision—rarely missing a target. So the 38% drop in BMW's first-quarter net profit, to $800 million, announced on May 3, caught many by surprise, even though the comparison was distorted by a one-time gain in 2006. The group's operating margin slipped to 5.3%, from 6.8% in 2006.

Is BMW's vaunted profit engine starting to sputter? Probably not. Chief Executive Norbert Reithofer, who took control last September, was quick to affirm BMW's earnings will rebound later this year and the company will meet its full-year targets. The first-quarter dent to earnings resulted from a strong euro, high raw material prices, and investments in new-model launches. The first-quarter comparison was also affected by a $512 million gain from an exchangeable bond in Rolls-Royce Group booked in the first quarter of 2006.

BMW, the world's No. 1 premium automaker (by vehicle sales), doesn't suffer from unsold cars piling up on dealer lots. Group sales edged up slightly, to 333,200 cars, and revenues were up 4.9%, powered by rising revenues per vehicle. Sales of the popular Mini declined 5.2% in the first quarter because the new-generation Mini just hit the U.S. market in February and is coming to Japan in March (see, 11/10/06, "BMW's Mini Evolution").

Bridging the Gap

Reithofer insists that new models will deliver a spurt of 50,000 extra vehicle sales in the second quarter of 2007, compared with the first quarter. New models set to launch in 2007 include a 3 Series convertible, a revamped 1 Series, and a facelifted 5 Series. In March, Reithofer forecast high single-digit sales growth for 2007 and a net profit higher than in 2006, after exceptional items.

Early next year, BMW aims to bring its hot-selling 1 Series compact to the U.S. market. BMW introduced the 1 Series in Europe in 2003 amid fears a lower-priced car would dilute the BMW brand. Instead, it drove sales by well-heeled younger customers and added to the brand's cachet. BMW is also developing a four-door coupe, a flagship sportscar that will challenge the Porsche Panamera due out in 2009. Dubbed the Concept CS, the super-luxury coupe will bridge the gap between the company's flagship 7 Series, which starts at $75,000 or $122,000, and the $333,000 Rolls-Royce Phantom. (BMW owns Rolls-Royce Motor Cars.) The Concept CS was unveiled at the Shanghai Auto Show on Apr. 20 (see, 4/23/07, "China Carmakers Go Upscale in Shanghai").

Far more vital to BMW's future performance will be Reithofer's strategic review expected later this year. The plan, which will set out BMW's strategy for the next 10 years, will have to square BMW's penchant for high-performance vehicles with the world's growing anxiety over fuel consumption and the harmful emissions that cause global warming. BMW's last such review was presented by former CEO Helmut Panke in 2001 and encompassed an ambitious product offensive that helped BMW overtake DaimlerChrysler's (DCX) Mercedes-Benz Div. in global sales.

Reithofer will unveil his strategic plan later this year but has already started promoting BMW's technology advances in energy-efficient engines.

A Morgan Stanley (MS) report released on May 3 noted that BMW will continue to produce "great products" but said given the pressure on earnings, other automakers such as Porsche are more interesting investments now.

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