It looks like the strength of the Euro is finally taking its toll....

From Reuters:

BMW (BMWG.DE: Quote, Profile, Research) reported a sharper-than-expected drop in third-quarter pretax profit on Thursday as the strong euro, high raw material prices and pricing pressure dogged the world's biggest premium carmaker.

The Munich-based maker of the sporty 3-Series car and X5 offroader stuck to its forecast for roughly flat 2005 pretax earnings, but gave itself some wiggle room by defining this as coming within 10 percent of 2004's record profits.

Poor results in its core auto business and a loss relating to a bond exchangeable into Roll-Royce Plc (RR.L: Quote, Profile, Research) shares pushed pretax profit down to 647 million euros ($776.6 million) from 779 million euros a year earlier, well short of an average estimate of 739 million in a Reuters poll of 23 analysts.

"Currency factors, high raw material prices and intense competition are all having an adverse impact," Chief Executive Helmut Panke said in a statement.

Shares in BMW fell 1.9 percent to 35.67 euros by 1200 GMT while the DJ Stoxx European automotive index slipped 0.6 percent.

"This (result) clearly shows that BMW -- despite a very young and attractive model lineup -- is unable to translate the strong top line into margins," said Dresdner Kleinwort Wasserstein analyst Jens Schattner, who thought BMW would not be able to match its 2004 pretax profit of 3.55 billion euros.

For the first nine months, group pretax profit fell 12.5 percent to 2.38 billion.

Morgan Stanley analysts noted that BMW would have to boost fourth-quarter profit 40 percent to reach 2004 levels, a feat hardly likely given economic and competitive headwinds.

CORE BUSINESS DISAPPOINTS

BMW's quarterly automotive pretax profits fell 7.9 percent to 639 million euros despite a 13.5 percent rise in revenues to 11.7 billion. The market had forecast a profit of 708 million.

External factors such as adverse exchange rates and raw material prices could hit results by between 700 million and 1 billion euros this year, BMW executives told a conference call, but added they working to offset this.

The strong euro hurt more in the third quarter than it had in the first half, in part because BMW had used up an old currency hedge, Chief Financial Officer Stefan Krause said, adding more currency hits lay ahead in the fourth quarter.

BMW has long held that the dollar would start to recover against the euro and so did not lock in rates when the euro rose to 1.32 or 1.36 to the dollar, he said.

"We still assume that in the future -- in 2006, 2007 -- the dollar will recover again and balance out this relative strong weakening versus the euro," he told a conference call.

He gave no details on plans for currency hedging in 2006.

A fair-value loss on an option related to BMW's 9.1 percent stake in British aircraft engine maker Rolls-Royce Plc (RR.L: Quote, Profile, Research) via an exchangeable bond had a negative impact of 175 million euros on group earnings in the third quarter.

Krause said the rising Rolls-Royce stock price benefits BMW's equity rather than its profit-and-loss statement.

Pretax profit at Financial Services grew by 18.4 percent to 167 million while BMW's motorcycle business swung to a profit of 4 million from a loss of 13 million.

On Monday, BMW had denied a report that quoted Panke as saying full-year 2005 earnings would be flat to 10 percent lower, although analysts say they are no longer ruling out that BMW will fail to meet market consensus earnings forecasts.

"We expect consensus EPS estimates to fall near our 3.10 euros for 2005. And 2006 consensus is likely to come under pressure from a lower base effect," Morgan Stanley said.

BMW shares have risen around 7.5 percent so far this year, lagging their benchmark index's 16 percent rise, and trade at around 10.4 times estimated 2006 earnings versus 11.7 times for arch rival DaimlerChrysler