By Edward Taylor
FRANKFURT (Reuters) - German luxury carmaker BMW AG (DE:BMWG) posted third-quarter operating profit well above expectations on Tuesday thanks to strong demand for its sports utility vehicles.
BMW has bet big on electric vehicles and small city cars such as the Mini. But it was gas-guzzling SUVs such as its biggest offroader, the X5, which helped boost BMW's sales and margins.
In the third quarter, sales of BMW branded cars rose 6.9 percent, as demand for X1, X4 and X5 sports utility vehicles helped lift operating margins for BMW cars to 9.4 percent -- above the 8.6 percent achieved by rival Mercedes-Benz Cars (DE:DAIGn) or the 9.2 percent seen at Audi (DE:VOWG_p)
Quarterly earnings before interest and tax (EBIT) rose 17 percent to 2.26 billion euros (1.77 billion British pounds) above a forecast for 2 billion euros in a Reuters poll.
"BMW continues to deliver very strong earnings and the outlook for the rest of this year remains very encouraging in our view," analysts at Evercore ISI said in a note.
Net profit, however, slipped 1 percent to 1.31 billion euros, below the 1.35 billion euro poll average. BMW said this was due to a higher tax bill and a writedown on the value of its stake in carbon fiber manufacturer SGL Carbon (DE:SGCG).
BMW shares rose almost 3 percent in early trade before reversing gains to trade down 1.7 percent at 83.84 euros by 1106 GMT, among the leading decliners in a 0.5 percent-higher German blue-chip DAX (GDAXI).
Between January and September, sales of new BMW branded sportscars improved in all regions, including Europe, Asia and the United States, despite a 7.5 percent slide in the Mini brand and lower sales of the BMW 3-series model.
The company's biggest sports utility vehicle, the X5, saw sales surge 34 percent in the first nine months of 2014, helping to keep BMW's auto operating margin at the upper end the company's target of 8 to 10 percent.
Operating cash flow in the automotive division fell 36 percent as BMW increased production of new models for a global rollout, including the Mini 5-door, which appeared in European showrooms at the end of October.
LACKLUSTRE ELECTRIC
BMW has invested billions in developing electric car technology, launching its own "i" brand, but sales of the i3 hatchback failed to take off, reaching 10,199 vehicles by the end of September.
Sales would have been higher but production constraints limited supply, Chief Executive Norbert Reithofer said on Tuesday. In February, BMW said it had received "more than 11,000 orders" for the all electric i3 hatchback.
"Expenditure on new technologies will remain high throughout the remainder of the year. One important factor driving this trend is the need to develop new technologies aimed at bringing down CO2 emissions even further," BMW said.
Slack demand for electric cars has forced smaller makers such as Fisker Automotive Inc and Coda Automotive to file for bankruptcy, along with electric car charging network firm Better Place.
More recently, both Daimler and Toyota said they had sold off their stake in electric carmaker Tesla, but both makers continue to make electric cars.
But BMW has hedged its bets and also opted to make more and bigger lifestyle offroad vehicles, which already make up about 30 percent of its vehicle fleet.
The United States has seen a resurgence in demand for sports utility vehicles thanks to cheaper fuel from shale oil, which will push the United States past Saudi Arabia and Russia to become the world's top oil producer in 2015.
Earlier this year BMW said it would build an X7 model, and expand production at its SUV factory in Spartanburg, South Carolina, by 50 percent.
Sales of the Mini are also expected to rebound with the next generation three and five door versions hitting showrooms across the globe, BMW said.
Last year, BMW led the pack among the German premium auto makers, selling 1.65 million BMW branded cars worldwide. Audi was next at 1.57 million and Daimler in third place, selling 1.47 million Mercedes-Benz branded cars.
(1 US dollar = 0.7996 euro)
(Reporting by Edward Taylor; Editing by Georgina Prodhan and David Clarke)