BMW Soars Thanks to BEVs

The German luxury car brand reported solid growth in sales and deliveries in the third quarter, but the bottom line suffered a substantial loss as the company absorbed interest hedging losses.

BEVs Lead Sales Higher

BMW delivered 621.7K vehicles in the third quarter, a 5.8% increase over the prior year, as supply chain constraints have vanished, and demand remains strong in Europe and the Americas. The largest increase in sales was thanks to battery electric vehicles (BEV), which saw a 79.6% increase over the prior year, totalling 93.9K or a little over 15% of the company's deliveries. Naturally, the company announced it was pushing forward with its electric range, particularly in the premium brand segment, as it targets 25% of its sales to be electric by 2025. Operating margin for their luxury car business came in at 9.8%, beating estimates of 9.6%

Europe has seen exponential growth in electric vehicle sales over the last three years, with 22% of new car registrations being electric last year. This puts BMW somewhat behind in the electrification trend, with only 15% of its sales being BEVs. On the other hand, it's on par with the percentage of sales, as high demand for electric vehicles in Europe has pushed consumers to import and register cars from overseas. But that demand is uneven, with the relatively sunny south buying significantly fewer EVs than the rather cold (and sunless in winter) north. BMW's electrification drive could face cultural and regional challenges despite the company's rosy outlook on growth.

Hurt by Rising Interest Rates

So far this year, BMW has spent €5.22B in R&D, with the bulk aimed at electrification and automation, a 6.7% increase over the prior year as it ramps up capital expenditure (+8.5% y/y) faster than sales to get ahead of competitors in the self-driving arena. But it still has enough money to keep up with its annual €2.0B share buyback program, which seems to have left investors happy as the stock jumped 1.6% in the premarket after reporting earnings.

The company also affirmed its outlook for solid growth deliveries and expects an EBIT margin in its automotive segment of 9-10.5%, with the midpoint above the 9.8% reported in the third quarter. Mercedes-Benz and Volkswagen reported lower margins recently. With all those positive comments, BMW also disclosed that its profits for this year were down big compared to the prior year due to expected hedging changes. This came after reporting earnings of -€289M, compared to +€480M last year. The cause? Reassessment of the value of interest rate hedging transactions. The ECB's drive to raise rates contributed to the company being forced to report unrealised losses on its interest hedging positions. Without that, profits would have increased compared to the prior year. But, with well over €5B a quarter in free cash flow, the company can likely hold the positions until maturity, which could imply a one-off increase in profits later. Therefore, investors are comfortable looking beyond the bottom line figure for now and focusing on the higher growth figures expected for next year.

H&S in Spotlight After Surge

The stock price of BMW may have completed a head-and-shoulders pattern down at EUR 86, pending a neckline breakout in the short term. If bulls fail to deliver, the trend could continue until the golden pocket at 85 is taken out –a typical pullback support following H&S patterns. Under there, support is expected around 77. On the flip side, control of the territory above the neckline could open the door to the shoulder-high at 100 and, in turn, expose the peak of 115.

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Key Takeaways

In the third quarter, BMW reported solid sales growth, driven by strong demand for battery electric vehicles. However, it is still behind competitors in electrification and faces challenges ahead as demand for EVs varies by region. While revenue was up, BMW reported a loss for the quarter due to unrealised losses from hedging as higher interest rates impacted profits. The car manufacturer has enough free cash flow to hold these positions until maturity, so investors looked past the loss and focused on the growth in sales and the company's outlook for the rest of the year.