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Mercedes Expects Strong Profits

Mercedes Expects Strong Profits.

But Storm Clouds Gather Including Diesel Threat.

Daimler, which owns Mercedes-Benz cars, was hugely profitable again last year and expects to perform at least as well in 2018, but investors are worrying that the strength of the euro might knock it off course, while ongoing spending on new technology won’t necessarily mean the investments make sense.

Investors are also hoping Daimler may finally decide to spin-off the truck division by the end of this year, but the currency worry won’t go away for a while, and the controversy over diesel engines has the potential to suddenly blast a huge and expensive hole in its preparations for swingeing European Union CO2 and NOX emissions regulations. News last week that monkeys had been involved in the testing of diesel engines has the emotional element that could trigger huge public revulsion in the technology.

But first; the good news.

In 2017, Mercedes-Benz net profit rose 24% to a record 10.9 billion euros ($13.6 billion), and that makes the company’s forecast of a slight growth in earnings for 2018 more exciting than it might seem at first. Mercedes’ profit margin rose to 9.7% from 9.1% in 2016.

Daimler’s stock price has been steadily moving higher from 59 euros on July 31, 2017 to a peak of 74.33 euros on January 17. Since then the stock has slid downwards to close Friday at 71.82.

Bernstein Research analyst Max Warburton is looking for a truck spin-of to boost interest in Daimler’s stock.

“The market has got used to Mercedes’ huge profitability and anything short of double digit margins seems to disappoint. But the reality is that 2017 was a stupendous year. 2018 will be similarly profitable. However, earnings are not the important thing for this stock right now. The important thing is whether this company really is heading for a change of structure – and in what form,” Warburton said.

Citi Research analyst Michael Tyndall said for Daimler shareholders the future looks cloudy because 2017’s final quarter was weak, on the back of currency problems and the fact that profit growth is coming to an end, while massive investments for the future loom large. Tyndall also looks to action to spin-off Trucks to create value for shareholders, but details are short.

Electrified alternative
Daimler has said that by 2022, every segment from compact cars to large SUVs will have one electrified alternative. Mercedes plans more than 50 electrified modes by then.

Reuters Breaking Views columnist Liam Proud also points to the converging negative factors which will pressure profit growth.

An industry-wide shift to new technologies such as electric and self-driving vehicles already eats up a chunk of the carmaker’s resources. Daimler spent 8.7 billion euros ($10.8 billion) on research and development last year, 15% more than in 2016. But the pressure to keep up with rivals means the German group expects 2018 operating profit to be similar to last year’s level. Given increasing sales, that implies a lower margin,” Proud said.

Investment researcher Evercore ISI sees the negatives facing Daimler, but despite that, remains confident.

“Daimler, similar to the rest of the industry, is facing material headwinds (raw material prices, currencies) which offset the benefits from a solid demand for cars and strong truck sales,” Evercore ISI analyst Arndt Ellinghorst said.

“We remain convinced that a Trucks IPO (initial public offering) is on the agenda for 2019,” he said.

But Ellinghorst said Daimler was the first German manufacturer to specifically highlight foreign exchange as a major headwind for the year.

“Daimler will not be alone facing these headwinds which is the reason for our more cautious sector view,” Ellinghorst said.

Bernstein’s Warburton is convinced good things will happen at Mercedes this year, with the spin-off a bonus to come.

“It seems Mercedes is confident of outgrowing BMW and Audi again in 2018 – a view we agree with. Management also insisted again that diesel residuals are not an issue and believe fears about the decline of diesel are centered in Germany and the U.K. Daimler’s confidence on diesels – shared by its peers – is partly a communications strategy of course. It is counter intuitive that residuals are holding up. But the fact is that – according to the companies that track the data – diesel residuals have not collapsed and they’ve not yet hurt Mercedes – or financial services – profits,” Warburton said.

“I’m pretty convinced Daimler is looking seriously at breaking itself up. The cleanest way to do this is to spin off the Truck business into a separate listed company,” Warburton said.

If Daimler opts for this spin-off route, it won’t be long before investors start imploring Volkswagen to do the same with Audi and Porsche, and its truck division.


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