BMW, like most of its rivals, is benefiting from the global SUV boom. Global sales of its X5 were up 34% in the first nine months of 2014. Source: BMW Group.

BMW Group (BAMXF 1.97%) said on Tuesday that its third-quarter net profit fell slightly year over year, to 1.31 billion euros ($1.6 billion), on higher taxes despite a 4.5% increase in revenue.

The tax bill was high, but the underlying results reflected a strong quarter for BMW. Pre-tax profit rose 17.1% to 2.26 million euros, beating analyst estimates, and the company reaffirmed its previous guidance for record sales and higher full-year earnings.

But BMW's stock fell over 2% in early trading in Frankfurt, on news that the luxury giant's global sales growth in the quarter lagged that of its two key German rivals, Daimler's (MBGA.F -1.47%) Mercedes-Benz and Volkswagen Group's (VWAGY -1.77%) Audi.

A look under BMW's hood
BMW divides its business into three key segments: automotive, motorcycles, and financial services. Here's how each performed during the third quarter. Note that all of the divisional earnings numbers are EBIT, meaning they don't include the effects of interest or taxes.

Automotive, which includes the BMW, Mini, and Rolls-Royce car brands, earned almost 1.7 billion euros during the quarter, up 9.7% from a year ago. Revenue rose 5.5% to 18.1 billion euros, as sales spiked 5.8%. Improvements in pricing, especially in Europe, helped drive the gain -- but those improvements were somewhat offset by increased spending on future models and new factory facilities, CFO Friedrich Eichiner said in a prepared statement. 

Rolls-Royce sales were up over 24% in the first three quarters of 2014. The brand revealed the new Ghost Series II sedan in New York earlier this year. Source: BMW Group.

That sales growth lagged the 9% gain posted by Mercedes-Benz and the 7.2% increase for Audi. Both have stated they aim to take BMW's global luxury-vehicle sales crown by the end of the decade, and both have added new lower-cost models in an effort to boost sales numbers.

But Eichiner insisted BMW is emphasizing profitability over sales totals. "We won't boost sales at any price," he told investors on Tuesday. The automotive unit's operating profit margin was 9.4% in the third quarter, up from 9% a year ago, and beat the third-quarter margins at both Mercedes (8.5%) and Audi (9.2%).

Eichiner said BMW now expects "solid" sales growth, in the 5% to 9% range, rather than "significant" growth of 10% or more, as it focuses on maintaining its strong profit margin.

Motorcycles posted a new sales high in the third quarter. Over 29,000 units were delivered, Eichiner said, an increase of 3.6% that helped drive the unit's nine-month sales total over 100,000 for the first time ever. Revenue rose 14.2% to 370 million euros, and profit jumped to 26 million euros versus a 5 million euro loss a year ago. 

BMW Motorrad, the company's motorcycles unit, is gearing up to launch several new models, including the S 1000 RR. Source: BMW Group.

Year to date, the unit's sales growth has outpaced that of the global market, particularly for motorcycles with engines larger than 500 cubic centimeters, Eichiner said. BMW's nine-month sales gain of 7.6% was driven by solid growth in both Europe and the U.S. Year-to-date revenue for the unit was up 10.9% to 1.37 billion euros, he said.

Financial services is BMW's global in-house financing arm. It earned 455 million euros during the third quarter, up 14.3% from a year ago, on strong growth in its Asia-Pacific region -- particularly in China. The unit had over 4.2 million "contracts" -- financing and leasing deals outstanding -- at the end of the quarter, up 5.2% from a year ago. 

Eichiner said "credit risks are likely to remain stable for the rest of the year," as defaults have remained within expectations. On the leasing front, Eichiner said he expects residual values to stay stable in Europe and Asia, but values could trend down a bit in North America in line with an overall softening of the used-car market.

Cash, debt, and full-year guidance
BMW reiterated its previous guidance for the full year, saying again it expected to achieve new records in total sales volume and pre-tax profit. CEO Norbert Reithofer said BMW expects its total sales to break 2 million for the first time, along with a "significant increase" in pre-tax profit over the 7.9 billion euros earned in 2013.

Reithofer is targeting an 8% to 10% operating margin for the automotive unit for the full year, but noted that "economic and political developments" could affect the forecast. Automotive's operating margin was 10.2% through the first three quarters of 2014, up from 9.5% over the same period in 2013. But Eichiner said costs are likely to rise in the fourth quarter as the automotive unit gears up to launch several new products.

BMW automotive had "net financial assets" of 12.1 billion euros at the end of the quarter. Its free cash flow of 1.31 billion euros through the first nine months was down from the year-ago total. That's due to the heavy investments BMW is making in new products and advanced technology, part of its long-term plan to keep pace with rivals. 

The upshot: BMW remains on course
BMW remains the world's biggest-selling luxury automaker, though Audi is a close second and gaining ground. But while it might lose that crown before long, that's not necessarily a bad thing as long as it maintains strong global profit margins. 

Margins, profit, and cash flow could dip a bit in the fourth quarter as BMW's spending on future products hits the bottom line. But that spending should ensure that BMW's longer-term outlook remains bright -- as long as the global economy cooperates.