BMW profit smashes forecasts on China demand

Germany's BMW, the world's top maker of luxury cars, reported forecast-beating profit for the second quarter, driven by sales of its popular 5 Series model and rising demand from brand-conscious China.

Earnings before interest and tax (EBIT) as a percentage of revenue grew to 9.6 per cent in the three months to June from a loss last year, far exceeding the 6 per cent expected in a Reuters poll.

"This is the highest level of profitability since 2006," Sanford Bernstein analyst Max Warburton wrote, adding that BMW, Mercedes-Benz and Volkswagen's Audi brand may be entering a new period of record profitability as long as Chinese demand and a favourable US dollar exchange rate hold up.

Germany's top three premium carmakers reported second-quarter operating margins north of 9 per cent just one year after their biggest industry crisis since the second World War.

"The crisis forced them to cut their costs faster. Now they have new models in the market like the BMW 5 Series, Mercedes E-Class and Audi A8 and are benefiting for the first time in years from currency tailwinds," UniCredit auto analyst Georg Stuerzer said.

"The key question remains whether demand will remain stable from here. I believe a possible economic slowdown will only have have a moderate impact on premium carmakers and expect the second half will show only a seasonal weakening in results," he explained. BMW shares rose 4.6 per cent to €43.80 by 0903 GMT, against a modestly higher European autos sector.

BMW reaffirmed its 2010 sales and earnings forecast that it raised in mid-July, predicting retail volumes would increase by around 10 per cent to more than 1.4 million vehicles while the automotive EBIT margin would surpass 5 per cent.

"This now looks conservative in light of Q2 figures," Morgan Stanley wrote to clients, expecting consensus of 5.2 per cent to move up at least 30 per cent this year after BMW's second-quarter automotive EBIT was nearly twice as high as market expectations.

BMW reaffirmed its 2012 return targets, which include an 8-10 per cent automotive EBIT margin.

"We believe the stock remains on track to reach a new earnings peak of €7 (per share) by 2013," Morgan Stanley added.

Both Mercedes and BMW are enjoying the benefits of a weaker dollar and a rebound in demand for luxury cars driven by China, while volume carmakers like Fiat are expected to struggle with shrinking demand as scrapping schemes expire.