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Daimler Strong Profit Performance Outweighed By Future Fears

Daimler Strong Profit Performance Outweighed By Future Fears.

Investors See Unavoidable Big Electric Vehicle, Autonomy Spending.

“We think we’re probably getting close to being as good as it gets from Mercedes”

Daimler surprised stock markets with an early report that first quarter profits were much bigger than expected, but the stock then continued its slow decline as investors reckoned that the Mercedes product cycle had peaked, while future earnings will be weakened by big spending on electric and autonomous vehicles.

Daimler was forced by regulators to announce profit figures prematurely because of the risk insiders might take advantage of the surprisingly strong profits, but the stock’s reaction – a short spike, then a continuance of the slow investor disillusion with the stock – showed that might have been an over-reaction.

Daimler shares are down nearly five per cent so far this year, and off nearly 30 per cent from the March 2015’s peak

In the event, Daimler’s operating profit jumped 87 per cent in the first quarter with earnings before interest and tax (EBIT) zooming to €4.01 billion, up from €2.15 billion in the same period of 2016. The Mercedes car subsidiary’s share of the profit rose to €2.23 billion from €1.4 billion.

In the first quarter, sales jumped more than 15 per cent to close to 561,000, as sales of the new E-class gained momentum. 

In 2016, grabbed the global luxury sales championship away from BMW. 

Citi Research was underwhelmed by the numbers, which it admitted were much stronger than expected but tainted by so-called “special items” totalling nearly €700 million, and suggesting company guidance for 2017 was too low.

Citi Research analyst Michael Tyndall said he would be more excited if he hadn’t seen this before.

“These results should push the stock higher, but we suspect the rally will be stifled by the market’s concerns around peak product cycle at (Mercedes) and the acceleration of Daimler’s spending on (electric vehicles). It may seem harsh but we are inclined to stay Neutral,” Tyndall said.

BMW preferred
Barclays Equity Research took a similar view, while holding back a firm conclusion for a full report from Daimler on the quarter, and saying it preferred BMW as an investment.

“We think we’re probably getting close to being as good as it gets from (Mercedes), while the truck division isn’t done with issues in North America with the cycle and in the EU with its cost base as illustrated by the new efficiency plan; all that when Daimler needs to be spending more for (electric vehicles) and automation,” said Barclays’ analyst Kristina Church.

Investment research Jeffries downgraded Daimler to “Underperform” citing Mercedes cyclical peak in profits.

“Margins peaked in 2015 and the most plausible explanation in our view is that Mercedes is not able to price added content and technology despite an impressive range of vehicles,” Jeffries analyst Philippe Houchois said.

Investment researcher Evercore ISI said Mercedes looks solid and should be able to deliver the 9.5 per cent profit margin which it expects for the year, but it too remains a doubter with an “Underperform” rating.

“While sales growth at Mercedes continues to impress and margins continue to hold, we remain on the sidelines on the name. 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 unrecognised earnings momentum. Given sector macro/cycle/UK/FX (foreign exchange) concerns and industry-specific challenges relation to regulation and technology disruption, we fear that a (manufacturer) stock needs a very compelling and company-specific equity story,” Evercore ISI analyst Arndt Ellinghorst said. 

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