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Daimler’s Shocking Loss Leaves Most Investors Unfazed

Low 2010 Profit Projection Said Conservative, Designed To Be Beaten
But One Says Profit Projection Too High, Mercedes Profit Pressured

Is it run for shareholders or employees, like most automakers?” 

Despite Daimler’s shocking, unexpected loss in the fourth quarter and scrapping of the dividend, investors refused to believe the company’s guidance that profits would be sharply lower than expected in 2010.

All apart from Morgan Stanley analyst Adam Jonas, that is.

Jonas forecast Daimler’s earnings before interest and tax (EBIT) for 2010 would be €800 million below the company’s forecast of €2.3 billion, because he didn’t buy into the expectation that Mercedes cars profits would rebound substantially this year. Daimler said its forecast for 2010 included a €2 billion rebound in earnings at Mercedes.

The average forecast for Daimler’s EBIT or operating profit is €500 million above the company’s projection, at €2.8 billion. Daimler includes Mercedes cars and trucks, and the EADS aerospace subsidiary.

“We expect a significantly slower recovery of Mercedes passenger car profit than the company and consensus forecast. (Mainly) because of our more muted view of a recovery at the core Mercedes-Benz passenger car division,” Jonas said.

Jonas said he reckons Mercedes profit margins will rise from minus 1.2 per cent in 2009 to plus 1.5 per cent in 2010. Daimler guidance implies a margin of 3.5 per cent, he said.

Red ink
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.

But 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.

Credit Suisse analyst Arndt Ellinghorst said he was sticking with his EBIT forecast of €3.9 billion for 2010, but wasn’t happy about the decision to waive the dividend.

“Daimler’s totally unexpected dividend cut and conservative guidance caused an outcry amongst investors. Whilst we understand the rational for a conservative guidance, we completely miss the point why Daimler hasn’t informed investors much earlier that a significant loss hinders a dividend under German accounting. After having expressed our criticism in the past, this is another setback with respect to (investor) confidence,” railed Ellinghorst.

Higher margins
Ellinghorst, in contrast with Morgan Stanley’s Jonas, reckoned the profit margin would be much higher at 6.4 per cent in 2010 (compared with Jonas’ estimate of 1.5 per cent) and Daimler’s guidance of between three and four per cent, although he sounded a bit nervous about the possible reasons for the company’s conservatism.

“This seems overly conservative to us, given our estimate of 6.4 per cent. However, if Daimler’s Mercedes guidance reflects the fundamental picture, we must ask ourselves if we are missing some major headwinds like pricing or mix for 2010,” Ellinghorst said.

Max Warburton, analyst with Bernstein Research said Daimler’s decision to dump the dividend without first preparing investors for the shock, raised questions about the company’s investor relations.

“(the decision) left investors unclear as what the company’s main principles and objectives really are. Is it run for shareholders (which it has claimed in the past) or is it run for employees, like most automakers?” said Warburton.

Nevertheless, Warburton was in the camp believing that Daimler was underestimating its prospects.

“We believe the reality is that Q4 results were (in reality) pretty damn strong and the company’s 2010 guidance is conservative and set with the intention of being comfortably beaten. We continue to like the fundamentals of Daimler,” Warburton said.

Responsible, cautious management
Merrill Lynch and Citigroup Global Markets all liked the Daimler  numbers and weren’t phased by the dividend surprise. Merrill Lynch called Daimler’s actions those of a responsible, cautious management, even if the dividend cut was overdone. It saw Mercedes margins rising to 4.6 per cent, compared with the implied margin of 3.5 per cent from the Mercedes profit target of €1.5 billion. Citibank retained its Daimler EBIT forecast of €2.9 billion for 2010, but cut its 2011 prediction to €4.3 billion from €4.8 billion. J.P.Morgan and Deutsche Bank also felt Daimler’s 2010 forecast was conservative.

That left Morgan Stanley in a minority of one, with Jonas believing that expectations for cost-cutting have run ahead of what is achievable. (Daimler said it cut costs by €5.3 billion in 2009). He also reckoned Audi, BMW and Porsche have a more attractive new product pipeline through 2011.

In a report, Jonas had a section headed – “Reasons why Daimler should burn cash in 2010” –

·      Depressed earnings – We forecast a 1.3 per cent margin for Trucks and 1.5 per cent for Mercedes, both well below normalised levels, in our view.

·      Rebound in Capex – Daimler’s 2010-2011 capital expenditure plan of €4.05 billion a year implies nearly a 70 per cent rebound from 2009’s €2.4 billion.

·      Working capital outflow – We expect Daimler to give back €1.9 billion of last year’s €5.2 billion positive working capital inflow, mostly because of higher inventories.

Neil Winton – February 28, 2010

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