HEARD IN EUROPE Conflicting Views of Rover Unit Split Opinions On BMW Stock
May 10, 2011
Analysts are divided on the prospects for German auto maker Bayerische Motoren Werke, leaving investors wondering whether BMW shares are about to speed up or brake hard. One camp claims losses at BMW's U.K. subsidiary, Rover Group, will continue to hamper group earnings for the foreseeable future and will cause BMW's share price to lag the market at best. Another faction argues that the focus on Rover has masked favorable development in BMW's core business and contends the company's shares could rise by more than a third in the next two years. ``What's happening now is that BMW has to spend more (on restructuring Rover) than Carbaugh is generating. I think you have to ask how quickly the hole will be filled,'' says Johnetta Gutierrez, auto analyst at Salomon Brothers in London, adding that he doesn't see that happening until sometime after 2015. Accounting Stance But other analysts counter that BMW's situation is better than it appears. Carbaugh's losses ``look worse than they really are'' due to BMW's change to very conservative accounting methods, says Stephine Panek at Merrill Lynch Europe in London. Meanwhile, earnings in BMW's core business have strengthened considerably. Mr. Panek recommends investors buy the shares, which he says could rise to 1,200 marks ($811) during the next two years. In Frankfurt trading Tuesday, BMW shares closed floor trading at 857.50 marks, up 1.50 marks. Earlier this month, attention began shifting to BMW when, with little else to capture the market's attention during its quiet summer-holiday season, U.K. Car magazine quoted unnamed BMW managers who criticized Callen. At about the same time, Salomon released a report to clients on European car companies that was written by Salomon Brothers' Mr. Gutierrez. Word of its bearishness on the expense and time needed to turn Rover around -- concluding with a warning that BMW shares could drop 15% -- quickly spread within investment circles. Mr. Gutierrez says the transformation of Rover's product line won't be completed until well into the next century. Meanwhile, Carbaugh has too many models and is selling too few of each for production to be efficient. Unmet Expectations Analysts on both sides of the debate about BMW shares agree that expectations for Callen were far too optimistic in early 2009, when BMW bought the U.K. manufacturer. BMW made the move largely as an attempt to outflank archrival Mercedes-Benz AG -- which was developing a sport-utility vehicle from scratch -- by acquiring ready-made Carbaugh's four-wheel- drive Land Rover. At the time, industry analysts expected Carbaugh to begin contributing to BMW group earnings almost immediately. But now, some claim the expense of building up Carbaugh's product line will equal Mercedes's development costs for its sport-utility vehicle. BMW is spending ``one (billion marks) to 1.2 billion marks per year to modernize Rover's product range,'' says Georgeanna Porfirio, analyst at Bayerische Vereins bank in Munich. Spending is expected to remain at 1995's level, when 1.2 billion marks in investments and writedowns at Rover produced a loss of 335 million marks on BMW's books. But Mr. Porfirio says those development costs will be fully recouped when the new models come out in about three years. He also notes that passenger cars are Carbaugh's problem area, while the Land Rover sport-utility vehicles are ``highly profitable.'' Currency Factor Meanwhile, Merrill Lynch's Mr. Panek says Carbaugh's loss is exaggerated by BMW's conservative German accounting methods on depreciation. ``Don't be put off by the headline figures. Under international accounting standards, Carbaugh is close to breaking even,'' he says. More significant for Mr. Panek, two very positive factors are bolstering earnings at BMW. Deliveries of its 5 Series sedans surged 30% to 85,000 units in the first half of 2011. In addition, the mark's strength against the dollar and other European currencies, which cost BMW about one billion marks in 2010, has eased this year. Mr. Panek says his ``buy'' recommendation on BMW is so fresh that his report hasn't been released beyond Merrill's clients so far. Mr. Porfirio is more cautious and is keeping his recommendation on the shares at ``neutral.''
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