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It Looks Like BMW By A Nose


Move over, Mercedes: Rival BMW is signaling to pass. On Mar. 16, BMW Chief Executive Helmut Panke forecast that vehicle sales will rise 7% to 9% in 2005, a growth spurt that will likely dethrone Mercedes (DCX) and make BMW the global leader in luxury cars. "BMW is in very good condition," says Arndt Ellinghorst, senior auto analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "Panke has an absolute grip on operations."

Challenger BMW has long boasted higher profit margins but lower sales than Mercedes. Now a wealth of new models is fueling robust growth just as Mercedes suffers a sales blowout, caused by quality problems and an aging lineup. No one excludes an eventual comeback by Mercedes, which saw flat group car sales last year of 1.22 million, only a fraction ahead of BMW. But Panke looks set for a smooth ride at the front of the pack for now, powered by four years of investments in new models, including the X-3 baby SUV, the 6-Series coupe, the 1 Series compact, and the iconic Mini, sales of which jumped 8.7%, to more than 184,000 cars, last year. The revamped 3 Series, BMW's biggest seller, will also lift growth through 2007.

Analysts forecast BMW's vehicle sales will hit nearly 1.3 million in 2005, while Mercedes struggles to match last year's total. Credit Suisse First Boston (CSR) predicts that revenues at BMW, which rose 6.8% in 2004, to $59 billion, will jump 12% over the next two years -- an industry-beating performance given slow- growing markets and the negative impact of a strong euro.

Panke's toughest job now will be matching his own profits record. The soaring euro and higher raw materials prices, especially for steel, will make it hard for the 58-year-old CEO to deliver gains this year. BMW boasts one of the auto industry's highest operating margins -- an enviable 8% in 2004 -- more than double Mercedes' 3.4%. And net profit rose 14.1% last year, to $2.97 billion. But analysts say less favorable hedging positions will squeeze profits by several hundred million dollars, leading to flat or slightly declining net income in 2005 and 2006. That reality has hit BMW's share price. In the past 12 months, shares rose just 3.7%, vs. a 15% surge in Germany's DAX Index. To buoy the price, Panke has announced a buyback of up to 10% of share capital.

The strong euro is also providing a tailwind to rival Toyota Motor Corp.'s (TM) luxury brand Lexus, which is launching a major marketing effort in Europe this year. A 40% rise in the euro's value against the dollar, vs. the 20% appreciation of the yen to the dollar, creates an exchange-rate gap, worries Panke. "That gap allows them to offer more for the price," he says.

PLAYING CATCH-UP

The good news is that BMW is churning out record volumes of cash. Strong net cash flow -- $733 million in 2004 -- is helping Panke invest in two entirely new models announced on Mar. 1. He plans a crossover vehicle with the high seating of an SUV and the silhouette of a coupe, plus a sporty takeoff on a minivan with a roomy interior. These will expand BMW's lineup to 12. The crossover will be built at the Spartanburg (S.C.) plant, helping BMW to hedge against the weak dollar.

The two models will keep BMW neck-and-neck with Mercedes, which plans two new crossover cars later this year. The R Class Grand Sports Tourer will be an SUV-cum-sedan, while the smaller, entry-level B Class Compact Sports Tourer will compete with the BMW 1 Series. Both Mercedes and BMW are tapping a growing demand for luxury cars that combine the pluses of an SUV's generous interior space with the cachet of premium sedans. But with Mercedes beset by cost and quality woes, a financially fit BMW has the momentum.

By Gail Edmondson in Munich


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