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Mercedes Profits Slip, But Industry Implications Are Reassuring

Mercedes Profits Slip, But Industry Implications Are Reassuring.

“Our goal is to return to our target margin corridor of 8% to 10% by 2021”

Mercedes Benz parent company Daimler reported sharply lower profits for the 2018 4th quarter, but reassured investors looking for evidence of how a possibly troubled year for the auto industry might turn out.

Daimler’s 4th quarter earnings before interest and tax (EBIT) fell 22% to 2.67 billion euros ($3 billion), as the profit margin on Mercedes cars fell to 7.3% from 9.5% in the year earlier period.

For 2019, Mercedes cars expects a profit margin of between 6 and 8%.

Outgoing CEO Dieter Zetsche said this wasn’t good enough.

“With our guidance for Mercedes-Benz Cars and Mercedes Benz Vans we are below our long-term target margins. We cannot be satisfied with this. Our goal is to return to our target margin corridor of 8% to 10% by 2021,” Zetsche said.

Bernstein Research analyst Max Warburton reckoned Daimler’s results summed up the condition of the global auto industry, as it cut its dividend and posted restrained targets for 2019. Growth has stalled and free cash flow growth was deteriorating, but overall the outlook for Daimler and the industry generally was not too bad.

“Earnings are likely to remain very solid by historic standards. Given the massive spending needed for next generation powertrain technology and the pressures being seen in the key Chinese market, 6-8% margins at Merc aren’t to be sniffed at,” Warburton said.

Many big manufacturers are likely to have similar forecasts, he said.

“End markets look OK, outside of China. Some of the margin pressure comes from (manufacturers) “future proofing” themselves with EV (electric vehicle) investments, which should ultimately reassure. The outlook is not that bad and the stocks have already de-rated. Will Daimler and its peers actually go down much from here? Let’s see,” Warburton said.

Not Sanguine
Citi Research analyst Angus Tweedie wasn’t so sanguine as he lowered his forecast for 2019 EBIT to 11.4 billion euros ($12.9 billion) from 12.3 billion ($13.9 billion), reflecting weaker than expected 2018 results and the outlook for this year. Tweedie retains a “sell” recommendation on the stock.

Our Sell rating continues to be predicated largely upon our structural concern that Daimler has supported margins through profit transfers from the fast-growing Financial Service division and capitalizing the cost of technological challenges. We see limited valuation support for shares particularly given the slowing volume environment in Europe,” Tweedie said.

Investment researcher Evercore ISI said Daimler’s financial report suggested 2019 and 2020 will be “significantly challenging”. But so far, markets have been holding up. Daimler has more difficulties than its peers because it employs too many workers.

At the moment, pretty much all end-markets are at very healthy, peak volumes. This support will more likely wane in coming years, limiting volume support. Delivering higher margins in falling markets remains an exceptionally difficult exercise for any carmaker. When benchmarking Daimler to its peers, it’s obvious that Daimler has higher labour intensity, which partially seems to be related to higher vertical integration,” Evercore ISI analyst Arndt Ellinghorst said.


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