Weak auto margin leads to BMW first quarter profit slump

First quarter pretax profit at BMW plunged 34 percent as higher launch costs for new models squeezed margins in its core automotive division, the company said today.

BMW shares slumped on the disappointing results as well as management's warnings that ramp-up costs would only begin to decline in the second half of the year and that raw material prices were higher than originally forecast.

Group earnings before tax fell to 852 million euros ($1.16 billion). But in the automotive division, they plunged 20 percent to 609 million euros ($828.3 million), managing a mere 5.3 percent return on sales that fell far short of last year's 6.8 percent margin.

"We expect business to increase noticeably in the coming months," CEO Norbert Reithofer said in a statement, confirming 2007 pretax profit would rise from last year's record level once a 372 million euros ($505.8 million) one-off gain was excluded.

During a conference call with reporters, BMW finance chief Stefan Krause declined to quantify the impact of launch costs for new models such as the upcoming facelifted 5 series and the 3 series with a retractable hard top, nor specify the burden from depreciation, foreign exchange effects or raw material costs.

BMW has said the extent of its profit growth would largely depend on the development in external factors such as raw material costs and currency headwinds, which combined to wipe out 844 million euros from its income statement last year.

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"For the most part nothing has changed as far as our expectations go although it appears as if raw material markets are certainly an area where we apparently have to expect more of a burden at the moment," Krause said.

Krause, who expects launch costs to at least stay flat in the current quarter before declining thereafter, said the rise in sales costs of about 50 million euros ($68 million) to 1 billion euros ($1.36 billion) served as a good indication for the drop in profitability.

The Munich-based carmaker has for years enjoyed solid gains in retail volume, breaking vehicle sales records on the back of sporty new models such as the X3 SUV, the 1 series hatchback or the retro Mini subcompact.

Earnings growth and profitability have also been impressive compared to many other European rivals, who have made expensive blunders with product ranges, neglected cost bases or failed to hedge foreign exchange exposure.

But investors have not rewarded BMW's steady growth story, often pricing the German premium carmaker at a discount, even to mass market competitors such as Volkswagen.

Reithofer, who took the helm of BMW in September, has initiated the group's first comprehensive strategic review since 2001 to position it for the coming 10 years.

"BMW is indeed a cheap stock, but as the earnings continue to face downward pressure, we believe the stock is cheap for a reason -- a continuing theme of great products and great company, but from an investment perspective, we believe there are better stocks to own for 2007," Morgan Stanley wrote in a note.