BMW's Finances Take A Turn For The Better

[JoshCalkins]

BMW's product and manufacturing strategy has been a bit different than many automakers over the past decade. Also, the fact that BMW has stayed independent and hasn't been folded into a larger auto conglomerate or sought tight partnerships with other manufacturers is a bit out of the norm for today. But that seems to be really paying off now that the car market has dropped off considerably.

BMW's strategy has been to offer increasing numbers of specialized and niche premium vehicles. The production of these vehicles is spread largely between Europe and the United States, though they are beginning to expand into Asia, most notably India. This spread out production provides a bit of a safety net and also allows them to precisely tailor production levels to meet demand. For example, sales on the 1-Series and 3-Series have risen in the past few months (compared to other BMW vehicles in that same time period), so BMW can add a few production shifts to the factories that produce those models while cutting back on others. This allows the company to ration their capital and avoid having large back-inventories of vehicles.

This strategy, combined with a recent stabilization of the premium vehicle market, has led BMW to increase their production schedules for the next six months, which has in turn increased the stability of their stock offerings, causing stocks to rise by 4% in the last week.

There's one more big reason why stock prices are rising for BMW: the European Union's version of a Cash-For-Clunkers tax rebate program that gives people money for trading in old, inefficient vehicles for new cars. European automakers Renault and Peugeot are two that have been benefiting greatly from this program, but with the rebates set to expire during 2010, their current production will wind up with 3 million more cars than the market can bear. BMW hasn't received many sales due to the Cash-For-Clunkers program, so they've tailored their future strategy to be stable and profitable with the current market, not one artificially inflated by government programs. And that stability, when viewed against the rest of the auto market, is highly desirable in the stock market.