BMW Has Best Carmaking Profitability Since 2011 on SUVs

Bayerische Motoren Werke AG, the world’s biggest manufacturer of luxury autos, reported its highest profitability from carmaking in three years as the X5 sport-utility vehicle won customers and demand rose in China.

Second-quarter earnings before interest and taxes at the auto unit widened to 11.7 percent of sales from 9.6 percent a year earlier, Munich-based BMW said today in a statement. The margin was the highest since the third quarter of 2011 and beat figures of 9.9 percent at Audi AG, the world’s second-largest maker of premium cars, and 7.9 percent at Daimler AG’s Mercedes-Benz Cars unit.

“It’s very impressive,” Arndt Ellinghorst, an analyst at ISI Group in London, said by phone. “The second half won’t be as strong, but they’ll have a stronger cash flow because they’re selling all the product.”

BMW, which reiterated a 2014 forecast today of a “significant” increase in pretax profit, is introducing 16 new or refreshed models this year to win customers and fend off efforts by Audi and the Mercedes brand to take the global premium-car sales lead by 2020. First-half sales jumped 30 percent for the full-size X5, and 7.5 percent for the up-market 5-Series sedan. BMW said profitability may decline the rest of this year as development spending rises.

Model ‘Mix’

“We had a strong product mix as well as regional mix, for example with growth in China as well as the U.S.,” Chief Financial Officer Friedrich Eichiner said on a call with reporters. “Costs were lagging during the first half, and many projects will come to fruition only during the second half.”

BMW rose as much as 3.8 percent, the biggest intraday jump since March 19, and was trading up 1.1 percent at 89.34 euros as of 1:03 p.m. in Frankfurt. The stock has gained 4.8 percent this year, the fourth-biggest increase on Germany’s benchmark DAX Index, valuing the company at 57.7 billion euros ($77.2 billion).

“Prices for cars in China have probably improved and there’s likely been a stabilization in prices in Europe” with dealers not chasing customers with significant discounts, Marc-Rene Tonn, a Hamburg-based analyst with M.M. Warburg, said by phone.

Earnings Rise

Second-quarter Ebit increased 26 percent to 2.6 billion euros, exceeding the 2.25 billion-euro average of 11 analyst estimates compiled by Bloomberg. Sales rose 1.8 percent to 19.9 billion euros.

The company is rolling out a van-like variant of its 2-Series compact and the plug-in hybrid i8, its first sports car in more than three decades. Those vehicles join a lineup that includes the i3 electric city car and the 4-Series coupe and convertible introduced late last year.

BMW plans to deliver more than 2 million vehicles in 2014, including the Mini small-car and Rolls-Royce ultra-luxury marques, reaching an annual sales target two years ahead of schedule. First-half group deliveries rose 6.9 percent to 1.03 million cars, including a 10 percent jump at the BMW brand. Including the Mini nameplate, the carmaker’s sales surged 23 percent in mainland China in the period.

The company reiterated a margin target range of 8 percent to 10 percent, which matches Audi’s goal on an ongoing basis. Daimler Chief Executive Officer Dieter Zetsche is pushing for Mercedes to become the most profitable luxury-auto producer with a 10 percent margin goal. The profitability goals mean all three carmakers are focused on containing costs as spending on technology rises, including work on meeting environmental rules.

Cost Strategy

“At BMW group, it’s not about cutting costs, it’s about damping the pace of cost increases,” Chief Executive Officer Norbert Reithofer said on the call. “This is especially due to European laws on emissions that require investment in expensive technologies as well as having to offer more smaller cars.”

First-half spending on new products and equipment totaled 2.58 billion euros, including investments at production plants in Germany ahead of production of the 7-Series and a new compact model, Eichiner said in a statement. Total capital spending rose more than 8 percent during the first six months, reaching 6.8 percent of sales. The spending ratio will probably exceed BMW’s target of less than 7 percent for this year while staying below the 2013 level of 8.8 percent, the company said.

The BMW brand’s lead in global sales in the first half shrank 28 percent to 16,997 vehicles ahead of Volkswagen AG’s Audi and fell 6.3 percent to almost 103,000 cars more than third-ranked Mercedes.

Audi, which has never held the top global luxury-car sales post for an entire year, will introduce 17 new or revamped vehicles in 2014, including a remake of the iconic TT sports car. Stuttgart, Germany-based Mercedes, which lost the lead to BMW in 2005, is bringing out 30 new models by the end of the decade.

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