Friday 15 November 2019

Share Watch: BMW hits sales accelerator - but needs to charge up electrics


In the last decade the impact of China on BMW has been considerable. Photo: REUTERS/Arnd Wiegmann
In the last decade the impact of China on BMW has been considerable. Photo: REUTERS/Arnd Wiegmann

John Lynch

It is an endearing Irish conceit that we are "ahead of the curve" in most things. In truth, like most small countries, we take our lead from nations that have resources we don't have to experiment and innovate.

Nowhere is that seen to better effect than in the unstoppable drive for electric cars. So far this year only 3pc of new car registrations here are for electric models. The Government is starting to make the right noises, but for many people electric cars are still a nice notion that we will get around to thinking about - sometime.

Contrast that with the company we are looking at today, the German giant BMW. For nearly a decade the Munich group has been agonising over the subject. Underlining the urgency with which it treats electrification, it currently employs a staggering 11,000 people in its research and development division and spends €7bn in 16 locations worldwide, primarily on electric cars. Neither the company, nor the investment community, is sure it has all the answers.

The health of the auto sector in Germany is critical and alarm bells are ringing for the three big German car producers: BMW, Daimler and VW.

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The others to varying degrees are feeling pressure for clinging to obsolete technology. But BMW is faring well. It trades in 140 countries, employs 134,000 and has a market value of €44bn. Its production locations include China, USA and South Africa.

Last year it produced 2.5 million vehicles, setting a record for the eighth year straight. It sold 2.1 million BMWs, 360,000 Minis, a record 4,000 Rolls Royces and 140,000 electric cars. The group's business in Asia grew, driven by China, BMW's largest market with more than a quarter of total sales. Market conditions in the US were challenging amid intense competition.

While last year was BMW's best on record for auto sales, the company is facing challenges from slowing growth in the US, China and Europe. It has not been helped by the US-China trade spat. In future the group will focus on installing battery and plug-in technology whilst planning for electric cars.

In the last decade the impact of China on BMW has been considerable. Revenues in 2009 were €50bn and profits a minuscule €400m. Then the Chinese car-craze kicked in and the group saw explosive growth.

Revenues last year were almost double that of a decade ago at €97bn with car sales contributing €85bn, the rest from financial services. Profits over the same period have catapulted to €9.8bn, the second-best in the company's history. Margins at 7pc were behind the expected target. The present share price is in the high €60s, half that of five years ago and trading at a forward price earnings multiple of nine.

Investors are concerned that half-year profits declined as car sales fell in the first six months in Europe and the US, although they rose in Germany and China. However, any investors who bought the shares a decade ago at €20 and held them are showing a handsome profit.

It is generally accepted that BMW's autos are masterpieces in engineering - comfortable, safe and crammed with electronic equipment and software.

Nevertheless, the company is facing major changes in a shift to electric cars, hybrids and even self-driving cars.

The rise of electric vehicles appears unstoppable with most forecasts showing them getting a bigger share of the global motor market within the next decade. But advances in battery technology have been slow and in performance terms, electric vehicles today are not capable of matching petrol or diesel cars.

BMW and others have no alternative but to step up their investment in electric and hybrid technologies. They may also have to find an alternative to the heavily polluting chemicals needed, at the moment, to fuel car batteries.

Interesting times ahead for BMW and the auto industry.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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