Daimler Raises Profit But Investors Shy About Global Picture.
“we fear that a stock needs a very compelling and company-specific equity story. This applies to VW’s turnaround rather than Daimler or BMW”
Daimler is respected by investors for the turnaround it has engineered for its Mercedes luxury car subsidiary, but they are also wary that global sales are peaking and there might not be much mileage in holding the company’s shares.
Investors are shying away from holding automotive shares and are concentrating on ailing VW, seen as the company with the most likelihood of improving its efficiency.
Daimler’s earnings before interest and taxes (EBIT) accelerated to €4.01 billion in the third quarter from €3.66 billion a year earlier, boosted by strong sales of the new E-class in particular and big demand generally in China.
Citi Research is a fan, saying profit margins at Mercedes may be at a peak, but they will remain strong thanks to the hugely improved product line.
“We maintain (Mercedes) segment leading margins are more than just a product cycle blip. To our minds the company has fixed its shortcomings in terms of SUVs and China, which together with a new crop of products that appear to be blockbusters has provided structural lift to margins,” said Citi Research analyst Michael Tyndall.
He pointed out that in the third quarter, an 11.4 per cent EBIT margin was attained despite 14 per cent lower sales of its highly profitable S-class. Investors also liked news that Mercedes was putting the brakes on its capital spending, which had been expected to be €7 billion in 2016, but which now looks more likely to be €6.2 billion.
At the Paris Car Show last month Mercedes showed its sub-brand of new electric cars called EQ. It is also probing new ways of generating revenue from autonomous cars and new digital services like the MyTaxi hailing app and Car2Go ride-sharing.
Other analysts saw Daimler shares as cheap compared with leading companies in other sectors, but were nervous that the demands of new emissions technology, connectivity and autonomous cars might undermine the company’s balance sheet long term.
Barclays Equity Research liked what it called the “self-help potential” of VW, or better products from BMW.
Morgan Stanley said Mercedes outlook was still strong, although trucks were deteriorating, but there was little chance of the cars division’s margins coming under pressure.
“The real question for long-term investors should be ‘How much better can it get’,” said Morgan Stanley analyst Harald Hendrikse.
“Global demand is slowing, global credit markets have been volatile in 2016, and regulatory and technology costs issues weigh on future cash flows and margins,” Hendrikse said.
“However we believe that the real problem may be lack of a growth story for 2017,” he said.
Investment researcher Evercore ISI summed up the trend with this “what have you done for us today” thought.
“We remain on the sidelines. Daimler’s turnaround of the Mercedes brand has been exceptional but we feel that this is well understood and leaves little room for positive surprises or indeed unrecognized earnings momentum. Given sector macro/cycle/UK/FX concerns and industry-specific challenges related to regulation and technology disruption, we fear that a (manufacturers) stock needs a very compelling and company-specific equity story. This applies to VW’s turnaround rather than Daimler or BMW at this point in time,” said Evercore ISI analyst Arndt Ellinghorst.
Daimler retained its forecast of slightly higher earnings for 2016 compared with 2015’s €13.8 billion. Mercedes is on track to overtake BMW in global sales for the first time in more than 10 years.