BMW, at 100, trails Mercedes in profit race
German luxury car maker BMW is celebrating its 100th birthday and looking forward to the next one, but arch-rival Mercedes-Benz is planning to cut the celebrations short as it stays ahead in the only contest that matters to shareholders: money making.
Last year, BMW narrowly retained its global crown as luxury market sales king, selling 1.9 million vehicles. Mercedes was a close second with 1.87 million sales, as it concentrated on its strong model overhaul with SUVs like the new GLE and the big-selling C-class, which rivals the BMW 3 Series.
New models coming up for Mercedes this year include the big new E-class sedan. BMW’s new-model conveyor belt seems to have stalled for the moment.
But according to investors, these sales contests are really just grandstanding. It’s the bottom line that counts and Mercedes is in pole position and looks like it’s staying there. Last year it snuck ahead of BMW with a 9.5 percent operating profit margin, up from 8 percent in 2014. BMW’s profit margin dropped from 9.6 percent in 2014 to 9.2 percent last year.
Berenberg Bank, based in Hamburg, Germany, says Mercedes, for years a profit-making laggard to BMW because of its dull, outdated cars and SUVs, has overtaken its rival with a dashing new range of vehicles.
Berenberg Bank analyst Adam Hull reckons Mercedes’ profit margin will hit 9.2 percent in 2017 compared with BMW’s 9.0 per cent this year and next. Investing in Mercedes’ shares also offers a bigger chance of making money than BMW, Hull said, adding that Mercedes should trade at a premium to BMW rather than the other way around.
And it’s not only Mercedes sharpening up its assault on BMW.
“There will be a sharp rise in competition to BMW’s high-margin medium to large SUVs. BMW’s X3, X4, X5, and X6 have sold well but, although they are still fairly new, combined X5/X6 sales fell by 1 percent, year on year, in February. First time SUV releases from Mercedes, Jaguar and Maserati, the new Audi Q7 and Q5, the new Mercedes E-class, the new Audi A4 (sedan), A5 (coupe) and Jaguar’s XE (sedan) will hurt BMW,” Hull said.
BMW makes most of its “X” SUVs at the Spartanburg, S.C., factory. Spartanburg also will be making the new huge X7 SUV with seven seats.
The competition is cranking up. Maserati launched its Levante SUV at the Geneva Motor Show earlier this month, which will compete with the BMW X5. Jaguar is currently launching its first SUV, the F-Pace. Its little XE will face down the BMW 3-Series shortly in the U.S.
Mind you, even if Mercedes takes over the profit crown, BMW is still seen as a strong financial contender, even if it has seemed to be too reliant on so-called “super” China profits for the last few years.
According to Barclays Equity Research, markets might have been getting less excited about its prospects, but investors shouldn’t worry too much.
“We think (ignoring BMW) undervalues the quality of the business and the work that management have done to ensure a smoother product cycle than peers," and therefore less cyclical margins, said Barclays’ analyst Kristina Church.
Church also was not alone in being surprised when BMW decided not to go for a big increase in the dividend to celebrate the 100th anniversary.
Meanwhile at the 100th birthday celebrations, BMW presented its Vision Next self-driving concept car which can be driven either by the computer or human owner. When the computer is driving, the steering wheel and center console retract and the seats swivel so that driver and front seat passenger can turn toward each other.
The company was also expected to reveal a Telsa Model S competitor, but disappointed investors, saying it wouldn’t appear until 2020 or 2021. BMW produces the i3 battery city car and i8 plug-in hybrid, as part of its “i” brand electrification plan. The i5 had been expected to match the Tesla Model S.
But it is BMW’s apparent strength in future planning that impresses investors. According to Berenberg Bank’s Hull, the Tesla matcher, which would be the company flagship and mark a step-change in autonomous driving, was delayed because of a desire to protect profits.
“It needs more time to develop these features, and we assume, wait for battery costs to fall. It appears the new CEO Harald Krueger is increasing focus on profitability,” Hull said.
Barclays Church said the “i” brand represents all types of innovation, not just electric ones and includes connectivity, autonomous driving, and artificial intelligence. BMW’s consistent spending in this area gives the company an edge over competitors like Mercedes.
“(This spending) highlights that they view the importance of technology over and above the merits of being a traditional car manufacturer and won’t have as big a spending hump ahead as peers,” Church said.