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Mercedes May Be Forced To Cut Profit Forecast For 2013

Investors Expect News To Come With First Quarter Results April 24

Mercedes parent company Daimler softened up investors for a possible warning that because of deteriorating markets in Europe and problems in China it may have to cut its profit forecast for 2013, after already acknowledging that earnings in the first quarter have stumbled.

CEO Dieter Zetsche, recently reappointed to head the company but for only three years and not the usual five, warned at the annual meeting that the outlook as worsened.

“Not much tailwind is anticipated from the markets in the coming months. For Europe in particular, there are no signs of a trend reversal. (Daimler will) reassess whether its previous market related assumptions for 2013 are still valid,” Zetsche said.

Daimler said it will announce further information on its outlook when it reports first-quarter results on April 24.

Daimler’s earnings before interest and taxation (EBIT) slid to €8.1 billion in 2012 from €9 billion the previous year, and said in February  this would hold steady in 2013, although earnings from Mercedes cars would decline slightly. In March, Mercedes conceded that first quarter profits would be lower than the last quarter of 2012, but didn’t extrapolate for 2013.

Stock price hit
Daimler’s stock price has taken a hit since Zetsche made his comments at the annual meeting, although it rallied a bit on rumours Mercedes will launch a small luxury car brand to rival BMW’s Mini.Daimler shares have been in steady decline since the end of March when the price hit nearly €50 and by mid-April had slid under €40.

 Reuters’s Breaking Views columnist Olaf Storbeck said he expects Daimler to be forced to cut its forecast, as long-suffering shareholders wish they owned BMW shares.

“Daimler investors know from experience that the production of premium cars doesn’t automatically translate into premium earnings. The company’s profitability lags behind that of its peers. The 7.1 per cent operating margin of flagship brand Mercedes-Benz is a third lower than BMW’s. The group is trying to address the problem but progress is slow and won’t happen in 2013. Daimler may even have to reassess its profit targets for the year,” Storbeck said.

Morgan Stanley analyst Stuart Pearson wasn’t sure that Daimler  would warn about profits on April 24, but might wait another three months.

“We expect Daimler’s recent underperformance to slow near-term. Daimler’s poor first quarter performance means they have to cut their guidance, right? Not necessarily. We believe that management likely kept increasingly unrealistic guidance late into 2012 as a form of ‘stretch-target’ for internal line managers. Cutting guidance as soon as the first quarter may thus send the wrong internal message in managements’ eyes. For investors, this could mean the guidance debate rumbles on for another quarter until second quarter results in July,” Pearson said.

 Over-excited
According to Citi Research, investors may have got a bit over-excited as they contemplated the sales prospects of the new CLA, the face-lifted E class, and upcoming new S class.

“We believe investors may have got ahead of themselves in their bullishness regarding a 2013 recovery. From an automotive sense, this was never going to come true, in our view,. Especially in Germany, with first quarter German sales running at 2.7 million units annualised versus our 3.1 million forecast,” said Citi analyst Harald Hendrikse.

 Neil Winton – April 15, 2013

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