BMW's Profit Margins Are Something. To Worry About

BMW is on a roll at the moment. They’ve booted Mercedes-Benz (their most hated rival) off the number one slot in India, they’re making big steps in China and their profit is rising fast. That last point is the fulcrum of this article. You see, profit is where BMW is forecast to have problems. Not lack of profits, but the size of them.

Bloomberg reports that although BMW achieved a profit margin of 8.1 percent, it’s still the smallest of the 3 German luxury car makers. Mercedes-Benz had an operating profit margin of 9.5 percent and Audi’s was 11 percent. The (relatively) low operating profit margin is, as Bloomberg posits, indicative of BMW’s vulnerability. Mercedes-Benz is the world’s largest maker of trucks and buses. Not to mention it has alliances with Renault & Nissan and a joint purchasing department for certain parts with BMW which will further help their margin. Audi, unsurprisingly, has the higher margin due its cost sharing with the rest of the Volkswagen group.

Despite announcing high profits of €871 million ($1.229 billion) for the 3rd quarter, BMW’s stock fell 3.3 percent on the stock market. Which is also indicative of an unhappy market. Though we know how accurate the market can be. “The profit margin looks clearly weak, much lower than Audi and Mercedes,” said Adam Hull, an analyst with WestLB, “The guidance is low. They should be able to do better.” Mr Hull has a “reduce” rating on BMW shares.

BMW refutes this criticism. “We’re at the beginning of a major model offensive,” said CFO Friedrich Eichiner, “We’re on an upward trend.” So BMW’s CEO, Norbert Reithofer, raised his operating profit target to more than 7 percent. Up from 5 percent. This disappointed some investors, according to Bloomberg. Especially when Daimler is aiming for an operating profit margin of at least 10 percent by 2012. BMW’s target for 2012? 8 percent. The message is clear from the market for BMW: Fast cars doesn’t necessarily equal fast money.