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SUVs Help Drive Record BMW Profit Despite Big Spending

In a preliminary report of its full-year 2017 earnings, German luxury-vehicle maker BMW AG (NASDAQOTH: BAMXF) said on March 8 that its operating profit rose 5.3% in 2017 from a year ago, to 9.88 billion euros ($12.23 billion).

BMW's profit increased year over year despite a jump in spending on future technologies, thanks to very strong global demand for its high-margin SUV models.

BMW will present its full annual report for 2017 on March 21.

Sales of BMW-brand SUVs rose almost 10% in 2017, helping to keep operating margins steady despite a jump in spending. Image source: BMW AG.

The raw numbers

All financial results are shown in euros. As of March 8, 2018, 1 euro = about $1.24.

Revenue98.678 billion94.163 billion4.8%
Autos sold2,463,5262,367,6034.1%
EBIT9.88 billion9.39 billion5.3%
EBIT margin, automotive segment8.9%8.9%unchanged
Net income8.71 billion6.91 billion26%

Data source: BMW AG. EBIT = earnings before interest and tax.

A note about BMW's preliminary earnings report

As noted above, the report issued by BMW on March 8 is a preliminary report of its 2017 earnings. It contains only basic full-year numbers, not the usual amount of detailed financial information. Like many other German companies, BMW releases its detailed fourth-quarter and full-year results at its annual meeting of shareholders, scheduled for March 21 this year.

That said, there was enough detail in BMW's preliminary report to get a clear idea of how the year went.

How BMW performed in 2017

Unlike most of its global luxury-vehicle rivals, including Audi AG (NASDAQOTH: AUDVF), Lexus, and Cadillac, BMW isn't owned (and funded) by a mass-market automaker with deep pockets with which it can share technology. That means that BMW has to fund development of advanced technologies like self-driving systems and electric power trains on its own, and CEO Harald Krueger has prioritized such long-term investments over new models that could generate incremental sales gains.

That spending was very visible in 2017. BMW's spending on research and development rose 18.3% last year from an already-high level in 2016, to 6.1 billion euros.

That rise in spending could have dented profits had sales been sluggish. But BMW was able to boost its global auto sales by 4.1% in 2017, thanks to strong demand for its crossover SUVs. Sales of the BMW brand's X models -- its SUVs -- rose 9.6% from a good 2016 result. That jump in SUV sales, along with strong sales of the upscale 5 Series and 7 Series BMW sedans, helped keep BMW's automotive EBIT margin steady at 8.9%, unchanged from 2016.

Here are some full-year highlights from BMW's brands and business units.

  • Automotive revenue rose 2.5% to 88.58 billion euros, thanks to that 4.1% increase in global sales volumes. Automotive EBIT rose 2.2% to 7.86 billion euros, helping to keep EBIT margins steady year over year.
  • Sales of BMW-brand vehicles rose 4.2% to 2,088,283 units. Key drivers, in addition to BMW's SUVs: the new-last-year 5 Series sedan line (sales up 6.3%); the flagship 7 Series sedans (up 4.5%); and the small 1 Series (up 14.7%).
  • MINI sales rose 3.2% to 371,881, a new record for the small-car brand. Strong year-over-year growth for the new Countryman (up 30%) and Convertible (up 12%) helped.
  • Rolls-Royce sales fell 16.2% to 3,362 on volatility in the Middle East and lost sales due to the launch of an all-new version of its top-of-the-line Phantom sedan. Production of the old Phantom ended early in the year, and while BMW noted that it has a large number of pre-orders for the new Phantom, the first examples weren't delivered until early 2018.
  • Sales at BMW Motorrad, the company's motorcycle unit, rose 13.2% to 164,153 in 2017, making it the unit's seventh consecutive year of record sales. Revenue rose 10.3% to 2.28 billion euros, and the unit's EBIT margin was a healthy 9.1%, up 0.1 percentage point from 2016.
  • BMW Financial Services' pre-tax profit rose 1.9% to 2.21 billion euros. Revenue rose 7.3% to 27.57 billion euros.

Rolls-Royce's sales fell in 2017 as the luxury-car builder transitioned to an all-new version of its flagship Phantom sedan. The all-new Phantom starts at about $418,000 in the United States, and extensive customization options can push the price much higher. Image source: BMW AG.

What BMW's CFO said about its preliminary 2017 result

CFO Nicolas Peter noted that BMW's research and development spending rose to 6.2% of revenue in 2017 from 5.5% in 2016 -- and said it was likely to rise again in 2018:

Last year we allocated around one billion euros more on research and development than in 2016 -- and nevertheless increased our operating profit. This is what we mean by sustained profitability.

In 2018, we expect the ratio [of R&D spending to revenue] to reach its highest level to date, with expenditure again rising by a further high three-digit million euro amount year-on-year. We need to earn these additional outlays by working with the utmost efficiency on the performance side while also maintaining a keen focus on the expenses side.

Looking ahead: BMW's guidance for 2018

BMW won't release its full guidance for 2018 until its annual meeting later this month. But Krueger said that BMW expects its overall sales to rise "slightly" in 2018 over 2017, with the caveat that it also expects the global political and economic environment to remain "volatile."

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.