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Daimler Riles Investors With Unexpected Outlook Change

Mercedes Prospects Suddenly Improve Thanks To China
“E” Class Prospers; Just As Well Given Updated Rivals On Horizon

Back in February, Daimler announced a shocking loss for 2009, scrapped the dividend and said things would be tough in 2010.

Many investors at the time found Daimler’s gloom and doom mood for 2010 exaggerated and inexplicable. After all, the new E class was selling like hotcakes all around the world, and the high margin S class was too.

So the announcement in late April that Daimler had changed its forecast for 2010 to show an operating profit of €2.5 billion to €3 billion at Mercedes cars, much better than the forecast in February of more than €1.5 billion, shouldn’t have shocked stock markets.

But it did, with the share pricing soaring to its highest in 1-1/2 years in Frankfurt, as Daimler also reported first quarter earnings before interest and tax of €1.2 billion. This handily beat forecasts of around €670 million.

In the fourth quarter of 2009 Daimler lost €352 million, and for the full year red ink amounted to €2.6 billion, compared with a profit of €1.4 billion the previous year.

Some investors were angry that Daimler could have been so wrong just three months ago. Even though they might have doubted the black scenario, they probably thought that Daimler had good reasons for its negative scenario. Questions are being asked about the quality of Daimler’s investor relations. At the time, most investors took comfort from the belief that Daimler’s traditional conservatism meant that it was deliberately underestimating 2010’s performance, so everybody could be nicely surprised a year from now; a year from then, not three months.

Adam Jonas of Morgan Stanley said Daimler had achieved 80 per cent of his earnings before income and taxes (EBIT) forecast in the first quarter.

“It is very hard to explain such a strong incremental margin on volume and costs alone. There must be much more: positive mix, pricing, profits from off-lease vehicles or a combination of all of the above,” Jonas said.

John Lawson, analyst with Citigroup Global Markets said China was a big positive, but there were also significant challenges ahead for Daimler. He said E class sales in China were strong, although the new BMW 5 series which is going on sale this year, and the new Audi A6 next year.

“While we see the E class effect as rather transitory, as 5 Series and A6 rivals appear in volume over the next 18 months, there is no obvious end in sight to the China boom, except that some caution is always wise in such a fast-changing marketplace,” Lawson said.

There are significant challenges too.

“Higher R&D, variable costs related to CO2 compliance and exchange rate headwinds are still part of the profit picture. So far we also see Daimler reluctant to offer any timing for its “Go For Ten” 10 per cent margin target, and nine per cent Automotive EBIT target,” Lawson said.

Deutsche Bank also said some important factors had changed in the last three months.

“With the dollar strengthening, product mix and sales recovering we believe that this updated earnings guidance is a far better reflection of reality,” Deutsche Bank said.

Neil Winton – April 25, 2010

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