An executive summary
BMW, Bayerische Motoren Werke AG, is one of the leading manufacturers of premium passenger cars and motorcycles. At present, BMW group is one of the largest car manufacturers in premium segment with three world's strongest brands, BMW, MINI and Rolls-Royce. The Company also has a strong position in the motorcycle segment and also operating successfully in the area of financial services. The company primarily operates in Europe and Americas. It is headquartered in Munich, Germany and employed 100,041 people.
BMW generates revenues through four business divisions: automobiles (71.2% of the total revenues during FY2008), financial services (26.2%), motorcycles (2.3%) and other entities (0.3%). In FY2008, Company delivered 1,202,239 cars of BMW, 232,425 are of MINI and 1,212 are of Rolls-Royce. The company's motorcycle division also sells 101,685 motor cycles in FY2008.
The financial services division focuses primarily on leasing automobiles, providing loan finance for retail customers and dealers, accepting customer deposits and providing insurance services. The division offers its services in more than 50 markets around the world. During FY2008, the company had 3,031,935 lease and financing contracts with dealers and retail customers, representing an increase of 15.3% over 2007.
The purpose of this report is to present a financial analysis the performance of BMW during the past five years and comparison with one of its major competitor and also to find some factors which add value to company's business advantage.
In this part of paper, we will analyze BMW in automobile industry and with one of its competitors Daimler AG (Mercedes-Benz).
At present car industry is characterized as massive and very competitive among manufacturers. Different manufacturers in this market always struggle with increasing cost of production and development. We are focusing on only car manufacturers of premium brand like BMW, Audi & Mercedes-Benz. These companies always focus on their values and exclusiveness of their brand.
In 2008, global recession drastically affected world economy. It also heavily affects BMW Group's performance in 2008. Especially during the second half of the year, consumers cutback their spending which affects all major car markets especially premium segment. The weakness of the British pound and US dollar also had a negative impact on market. In total, the BMW Group sold 1,435,876 BMW, MINI and Rolls-Royce cars during the year under report, 4.3 % fewer than in the previous year.
In FY2008, BMW had suffered losses due to market crash and global recession. BMW group revenues decrease by 5% to €53,197 million. The operating profit of the company was decrease by 78.1% to €921 million compared to 2007 and net profit was decrease by 89.6% to €324. The revenue for the BMW automobile segment decrease by 9.4 %, compared to year 2007, to euro 48,782 million. Profit before tax of automobile segment was euro 318 million. The revenue for BMW Motorcycle segment is euro 1,230 million in 2008, which is nearly same as last year. Profit before tax for motorcycle segment fell by 28.2% to euro 51 million. Only the business of financial Services segment rose in 2008. Segment revenue increased by 12.8%, compared to 2007, to euro 15,725. (BMW, 2008 annual report)
BMW Income Statement
Above graph shows the last five years figures, Total revenue and total cost are increased by approximately same amount every year till 2007. In 2008, the Revenue decreased by 3,000 for the first time since 2004, but cost of revenue maintained its increase. The growth of gross profit is consistent since 2004 till 2007. In 2008, it dropped 25% and was at the lowest in the last 5 years. Operating income and net income taken a dip as well in 2008. Both decreases are due to lower sales in 2008, global recession affecting company's returns. One thing is that both revenue and profit dropped significantly but the cost of revenue maintains increasing. There was a sharp drop in raw material prices also, despite total cost increased in 2008. It is an indication for Group to look into their cost reduction policies and adjust to market demands.
Daimler Income Statement
BMW revenue is affected only in 2008 because of global recession, but Daimler's revenue and cost of sale both are decreasing continuously since 2004. But there gross profit remains stable, slightly decreased in 2008 by 11% to 21,559 million euro. Operating income and net income also decrease as well in 2008 because of lower sales.
Above graph shows the comparison of last 5 years balance sheet (Including first 2 quarters of 2009). We can see continuous increase in Assets as well in Liabilities, but there is not much change in equity. It shows that company's growth stagnated after 2007.
In 2008, Capital expenditure, euro 4,204 million, was lower than 2007 (2007: euro 4,267 million). This year main capital expenditure was on the production of new models like BMW 7 series, Z4, X1 and mini convertible as well as infrastructure investments. Company is going to increase their production capacity in their major plants in California and China. It is also starting second production plant in China. The Company invested euro 2,980 million in properties, plant and equipment and other intangible assets. Euro 1,224 million in development costs were recognized as an asset which was at a similar to the previous year level of 42.4%. As a result of low revenue, the ratio of capital expenditure to revenue increased to 7.9% (7.6 % in 2007).
Cash from operating activities in decreased in 2008 but cash inflow from financing activities is doubled from 2008. It is because of receivables from sales financing and leased products. Increases in Investment activity especially in 2007 and 2008 are caused by expenditures and financing services. Cash took a significant plunge but it associated with the market crash and beginning of the recession. Net income decreased dramatically, due to global recession.
Above graph shows 5 profitability ratios (Operating Profit, ROCE, Gross Profit Margin, ROE, and ROA) to evaluate the profitability of BMW business. From 2004 to 2007, All 5 ratios have shown stability but in 2008 it fell significantly. This decline is because of global recession and lower sales. Sales are decreased and because of that operating profit and gross profit both decreased but our cost of sales is nearly same. We can see the effects in above graph all the financial ratios declined in 2008.
Above graph shows some efficiency ratios (Inventory on hand, Receivable on hand, Payable on hand) which give us view about the company's efficiency to manage different resources.
From 2004, BMW group's inventory turnover has been decreasing annually. At the end of FY2008, Inventory turnover of BMW is 60.3 (2007: 61.2 days) which means the stock held are being turned over faster than last year through inventory. It implies decrease in storage cost. Receivable days on hand increased from 2004 to 2007 but fell down for 2008. It means that the company is receiving its payment sooner. It provides BMW with cash on hand to make its own payments. On the other side, Payables days on hand has decreased in last 2 years (2007 & 2008). It means the company is paying off its suppliers/creditors within 21 days rather than 36 and 30 in 2006 and 2007 respectively. The company is paying off its creditors much sooner because of reception of payments sooner as well having cash deposits. It implies that The Company is getting more efficient in managing its inventory, as well as receiving of the payments and paying off their creditors. BMW groups cash operating cycle value is increased from 49.04 to 54.75 but it is because of there payable days in decreased.
But if we will compare cash operating cycle with Daimler, BMW is much more efficient. In 2008, there cash operating cycle is 97.01 days which is better then previous year (2007: 115.44 days).
It is due the fact that Daimler's Inventory turnover and receivables days values are much higher then BMW group.
In 2008, BMW Group's Current Ratio is 0.98 and Acid Test Ratio is 0.8; both values are better than previous year. Acid Test ratio is highest in last 4 years and current ratio is also better then 2007. It means that company is becoming more efficient to meet its short term financial obligations. They are becoming more efficient in managing their assets and liabilities. But if we see Asset Turnover Ratio, It has decreased and is the lowest since 2004, which implies that the company efficiency decreased to use up its assets of the business to generate sales revenue.
In comparison to BMW, Daimler's Current Ratio is 1.06 and Acid Test ratio is 0.73. Both values decreased from last year. In 2007 there Current Ratio is 1.27 and Acid Test ratio is 0.96. both values were highest in last 5 years.
The Gearing Ratio for BMW group has been steadily increasing since 2004. In 2008, debt to equity ratio increase to 298% (2007: 202%). It shows that Company is taking on more debt and exposing itself to greater risk of not being able to meet its obligations. In comparison to BMW, Daimler's gearing ratio is far better and it was continuously decreasing till last year.
If we see company's Interest cover ratio, it has been the lowest since 2004. It shows company's poor ability to cover interest due to lenders. This can engage shareholders to complain as there is a greater risk now for company operating profit not to meet interest payments.
"The negative effect of market crash and global recession were also reflected in BMW stock's performance. BMW common stock was closed at euro 21.61 on the last day of trading of 2008, 49.0 % below its level in 2007. Despite this sharp drop, BMW common stock was - against the background of an exceedingly difficult year for the stock markets - one of the best performers amongst European car manufacturers in 2008. BMW preferred stock finished 2008 with a market price of euro 13.86, down 61.8 % on a year earlier." (BMW Group annual report 2008)
"In process of refinancing, The BMW group were again issues bonds, notes and asset backed securities (ABS). Good ratings and continuous provision of information to the capital markets helped to reinforce the solid reputation enjoyed by the BMW Group. During the year, the BMW Group placed two benchmark bonds with a total issue volume of euro 2.5 billion on European capital markets. In addition, bonds for an aggregate equivalent amount of some euro 880 million were issued in Swiss franks, Japanese yen and US dollars and private placements were made in various currencies for an aggregate amount of approximately euro 4.7 billion. The BMW Group was also able to demonstrate its ability to obtain funds via ABS transactions once again, securitizing transactions totaling euro 5.2 billion in 2008. This included the placement of euro 2.5 billion each on US and European capital markets via conduit transactions." (BMW Group annual report, 2008)
BMW and Daimler both have been assigned long-term as well as short-term ratings from the rating agencies Standard & Poor's (S&P) and Moody's. These ratings show how much strong the issuer's commitment to meet its obligation is.
In November 2009, As a result of economic downturn and the uncertainty of a recovery in major markets, S&P changed BMW's Long term rating to A-/Outlook Negative. Before that Moody's assigned the rating A3/Outlook Negative (previously A2/Under Review for possible downgrade).
Same time S &P confirmed long-term corporate credit rating on the company to 'BBB+' from 'A-'. But With these A- and A3 ratings of S&P and Moody's respectively, the rating agencies certify BMW AG's sound solvency position for debt with a maturity of more than one year.
S&P also changed the BMW's short term ratings from A-1 to A-2 as a result of the downgrade in the long-term rating and in same way Moody's downgraded BMW AG from P-1 to P-2. Daimler's S&P short term rating is remained same as A-2. But these ratings show that market has more confidence in BMW than Daimler. (BMW Investors relations: Debt-Rating, 2009)
Future performance analysis
BMW group's sale is improved in last 2 quarters of 2009. BMW CEO Norbert Reithofer said that group's unit sales increased in November which shows demand for luxury cars in increasing. He said that they are expecting 10-15 percent drop in sales compared with 2008. (Norbert Reithofer, November 2009)
As per market growth and previous analysis, BMW group can manage to increase there sales and profit in 2010. As BMW group is concentrating on china, its sale is boosted by 35% to 8,131 cars in last month. We can see a good future growth in emerging markets and in companies other region too.
When analyzing the future trends, we can look at the mean values for the revenue and profit in the income statements.
The mean value of yearly revenue growth is approximately 8% till 2007. In 2008, because of global recession and market downturn revenue is decreased. But we have already seen that market is getting better and BMW sales in increasing from last 2 quarter of 2009. Thus growth of revenue looks positive in future. For 2009, assumption is based on previous year's performance, first 3 quarter results and total sales drop projection. As per improving market conditions and past sales growth, we can expect average revenue growth of 10% in next 3 years. But we have projected a conservative increase of 8% for next 3 years till 2012. However, cost to revenue is also increasing steadily in last 5 years. It is increasing around 8.2% every year till 2007, and decreased in 2008 and 2009 both. BMW is already implementing their cost cutting strategies, but with that they are also increasing there production as per expected sales growth.
- Norbert Reithofer, November 2009 http://www.reuters.com/article/idUSFAB01534820091202
- BMW Investors relations: Debt-Rating, 2009 http://www.bmwgroup.com/e/nav/index.html?http://www.bmwgroup.com/e/0_0_www_bmwgroup_com/investor_relations/corporate_news/news/2008/q3_erneut_positives_quartalsergebnis.html) http://www.alacrastore.com/research/s-and-p-credit-research-Research_Update_Daimler_AG_Downgraded_To_BBB_On_Reduced_Performance_Expectations_Outlook_Negative-728599
- BMW Group annual report, 2008