BMW lauds sales prospects, but investors worry about U.S. incentives


GENEVA, Switzerland -- German luxury car maker BMW used its 15 minutes with the media at the international car show here, to point out its increased sales target for 2007, and take credit for its attempts to improve fuel efficiency with high tech solutions.

Unfortunately, investors are not seeing the company in such a favourable light, and are fretting about its prospects in the U.S., where sales seem to be under pressure.

Investment banker Dresdner Kleinwort said BMW incentives in the U.S. are causing concern.

"BMW's discounting practice in the U.S. leaves us speechless. Since May 2006, BMW has offered structurally higher incentives compared to its peers and there appears to be no light at the end of the tunnel," Frankfurt, Germany-based Dresdner Kleinwort said in a report.

"Incentives stand at an average of $4,125 per vehicle, which is about 60 percent higher compared to Mercedes ($2,573) and Audi ($2,607). Most of these discounts are related to BMW's active move into competitive lease deals," the report said.

BMW achieved record global sales in 2006 of 1.37 million vehicles and expects to beat that again in 2007 with more than 1.4 million BMWs, Minis and Rolls Royces sold.

Morgan Stanley said BMW can expect tougher competition from Porsche and Audi, and agreed that it is being forced to increase incentives to sell its cars in America, and faces a massive challenge from new emissions regulations.

Morgan Stanley cut its rating on BMW shares to "underweight" from "overweight," and recommended investors buy DaimlerChrysler or VW shares instead.

It also suggested that BMW may have to seek an alliance partner to shore up its future.

"We believe BMW may be in the early chapters of a restructuring story - are investors prepared for this? Looking longer term, we believe BMW management (and the Quandt family) must consider a strategic alliance with another automotive partner to surmount the challenges of scale economies, geographic diversification and share access to new power-train technologies and emission solutions," said Morgan.

Morgan cut its BMW earnings forecasts by 5 to 6 percent for 2007 and 2008, mainly because of higher incentives in the U.S. and the weak dollar. Longer term threats include the introduction of the Porsche Panamera in 2009, while Lexus and Nissan's Infiniti are gearing up for a sales push in Europe.

At today's press conference in Geneva, BMW board chairman Norbert Reithofer said the company is making important progress using technology to improve fuel economy. The bottom of the range 1-series and the 5-Series will soon have regenerative braking, which conserves energy when the car is being braked, or is freewheeling. These cars will also include so-called "stop-start" systems, which automatically switch off the engine when the car is stationary, and reignite it when the accelerator is pressed.

But Dresdner Kleinwort is not impressed.

"Even discounts on the new X5 (large SUV) are back at $4,490. The 7 Series is supported with $11,345 (Mercedes S class $3,711). Against this diluted pricing level, a 15 percent increase in February unit sales (in the U.S.) is meaningless in our view.