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BMW reported its first quarter 2016 earnings this week. The main highlights were as follows;
Revenue
Revenues in the first quarter fell 8.8% year on year despite BMW selling 5.9% more cars than in the first quarter of 2015. The decrease in revenue is resulting from pricing pressures as most of the sales growth came mostly from the ‘small’ X1 Crossover. Sales across the more expensive segments were slow due to various factors that include old models and declining consumption patterns.
Competition also played its part as BMW was forced into higher discounting in order to compete with a new Mercedes line-up.
The trend to persist for the rest of the year; BMW are guiding towards a slight increase in revenue for 2016
Costs
The Gross Margin improved from 20.0% last year to 21.5%. The gain in margin originates mainly from a decrease in Research & development (CAPEX is reported with cost of sales). BMW is guiding towards a 5.0% of revenues CAPEX target for the whole year.
Earnings
BMW is currently trading at a low 8x earnings. Earnings will remain under pressure as a subdued economic environment and an increase in competition forces BMW to continue providing discounts on sales. The outlook for 2016 is thus subdued and this may be the year that BMW loses its crown as leading luxury brand.
Outlook
The company has maintained its guidance for 2016. Obviously this guidance assumes normal political and economic conditions. Since 2016 is turning out to be an unusually volatile year, these objectives may turn out to be a little too optimistic this year.
Beyond 2016, BMW’s massive investment in future technology provides ample confidence that BMW will remain a leader in the industry. The next few weeks and months may be an opportunity for the long term investor to add BMW to a diversified portfolio.
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