Criticism That Sales Targets Undermine Profits Won’t Go Away
“Rather than aim to be the biggest, the company should aspire to be the best”
Mercedes doesn’t have much support from investors, but at least it now has some, after reporting its financial results for 2012.
Citi Research rates the shares of Mercedes parent company Daimler a “buy”, while Commerzbank thinks Mercedes is now on the right track.
Daimler EBIT (earnings before interest and tax) profits fell 10 per cent in 2012 to €8.1 billion compared with the previous year. Daimler forecast steady profits for 2013.
Reuters’ BreakingViews sums up the rather more jaundiced view of Daimler by most investors, as it criticises CEO Dieter Zetsche’s target of re-establishing Mercedes as the world’s biggest maker of premium cars by 2020.
“Rather than aim to be the biggest, the company should aspire to be the best,” said Reuters’ Olaf Storbeck.
Silly, lust
“Daimler needs to look hard at ways to fix the issues that are undermining earnings. It will be difficult for Daimler to overtake BMW and Audi in volume terms not least because neither company will stand still. But while the Mercedes brand owner must avoid dropping further behind, it is silly to want simply to be the biggest. Attempts to gain pole position is a goal that may do more harm than good. It could encourage staff to chase unsustainable, costly, growth,” Storbeck said.
Deutsche Bank is also amongst the nay-sayers.
“We believe this to be the crux of the problem for Daimler – the lust for growth has come at the expense of net pricing and profitability. Ever since the plan to accelerate growth was formalised in the latter part of 2011 this trend has been going in the wrong direction, and all against the backdrop of a year which saw an €850 million tailwind from foreign exchange gains,” said Deutsche Bank in a report.
“We see currently little signs that management is considering strategic change, with Daimler hoping to achieve growth twice that Mercedes has achieved in the past,” Deutsche Bank said.
Mercedes wants to more than double sales to 2.6 million by 2020, with a bigger than 10 per cent profit margin. The profit margin in 2012’s 4th quarter was 5.2 per cent. Mercedes’s new model blitz includes the launch of the face-lifted E class at the Detroit Car Show last month, the new CLA in Geneva in March and the new top-of-the-range S class later this year. Zetsche’s “Fit for Leadership” campaign seeks to cut €2 billion from Mercedes costs by the end of next year.
Downside limited
Citi Research analyst Harald Hendrikse, in a report which said the performance last year was “not as bad as feared” reckoned 2013 will start weak for Mercedes, but downside for profits is limited.
“Even if the hoped for recovery in the second half of 2013 may be hopeful, Daimler remains the cheapest of the German manufacturers, and any recovery based on new models and or cost restructuring could provide substantial upside into 2014. Buy the shares,” Hendrikse said.
Commerzbank analyst Daniel Schwarz said the underlying quality of Mercedes earnings was much better, and stocks have been reduced
“Daimler remains the top pick in our universe, we see upside to margins, multiples and consensus,” Schwarz said.
But Morgan Stanley analyst Stuart Pearson fears the worst, and that Mercedes failures may infect BMW and Audi.
“We fear volume ambitions may push Mercedes towards pricing aggressively – an approach that could yet hurt margins at BMW and Audi, despite recent evidence of improved pricing in both Europe and China,” Pearson said.
Bernstein Research analyst Max Warburton is worrying too, saying pricing and mix are deteriorating.
“We fear the extent of the Mercedes margin slump may surprise negatively and the pace of recovery is unclear. All the fourth quarter does is remind us that Mercedes is making margins that are half of peers,” Warburton said.
Meanwhile, Zetsche’s five-year contract is up for renewal later this month.
Neil Winton – February 20, 2013
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