Narrow-moat, negative-moat-trend rated Bayerische Motoren Werke AG BMW reported better than expected first-quarter 2013 earnings per share results of EUR 1.99. This was EUR 0.22 ahead of the Street consensus EPS estimate of EUR 1.77, but EUR 0.06 below last year’s EUR 2.05 result. Demonstrating the reason for our narrow-moat rating, despite the decline in European volume and the competitive pricing in the region, BMW turned in the best first-quarter margins among our automaker coverage list. BMW’s narrow moat arises from its technological powertrain leadership, solid brand image around the world, ability to command premium pricing, and consistent generation of excess returns over its cost of capital. BMW’s negative moat trend rating stems from the industry’s growing capacity, which erodes all participants’ ability to generate excess returns. Currently trading at a 17% discount to our EUR 85 fair value estimate, we view four-star rated BMW shares as being attractively valued.

Headwinds successfully navigated during the quarter included the lackluster European market and a four-week facility shutdown for model changeovers. BMW also sold the Husqvarna motorcycle operations during the quarter. Management confirmed full-year 2013 guidance for record volume and pre-tax profit flat with 2012.

First-quarter 2013 revenue, excluding financial services, declined 1.6% to EUR 16.3 billion, down slightly from EUR 16.6 billion reported in the same period a year ago. However, automotive unit volume increased 5.3% compared to the first quarter of 2012. In Europe, unit volume rose 3.1% despite the markets 9.8% contraction. Even in Germany, BMW’s unit volume edged up by 0.6% where passenger car sales were down by 12.9%. Slightly lower revenue on higher unit volume is indicative of the price competition in Europe. However, clearly showcasing its narrow-moat rating, BMW’s EBITDA margin for the quarter was 15.4%, 2.9 and 7.7 percentage points higher than Volkswagen and Daimler, respectively.

Margin was also affected by a four-week facility shutdown in Oxford, England, and the sale of the Husqvarna motorcycle brand. BMW’s Oxford assembly facility underwent retooling to produce the MINI Paceman, an all-new model and the seventh in the MINI product line-up. Management describes the Paceman as a sports activity coupe competing in the compact premium vehicle segment.

The sale of the Husqvarna brand should provide a slight improvement to the motorcycle group’s margins as the brand is known more for lower priced bikes that compete in offroad Enduro and Motocross racing. BMW divested the Husqvarna Motorcycle brand on March 6 and will focus on its premium, on-road BMW Motorcycle brand. Out of BMW’s total of 27,015 motorcycles sold in the first quarter of 2012, sales of Husqvarna brand motorcycles were 2,642. In the first quarter of 2013, BMW sold a total of 25,842 motorcycles, of which 1,110 were Husqvarna brand.