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Mercedes Wows Investors With Profits As New Models Impress

But Moody’s Warns That Financial Performance Still Not Great.
Deutsche Bank Says Daimler Has Momentum Over BMW.

Mercedes has finally turned the corner with its new model programme and some investors are beginning to feel better about the future and occasionally preferring the company to BMW.

Some, but not all.

Mercedes parent company Daimler reported preliminary second quarter EBIT (earnings before interest and tax) of €5.2 billion, more than twice 2012’s second quarter of €2.24 billion. Higher margins at Mercedes were said to be behind the improvement, not to mention a big gain from Daimler selling its stake in aerospace company EADS.

Morgan Stanley calculated the Mercedes profit margin at 6.4 per cent, driven by the strong reception of new models like the CLA, A-class and revamped E-class. Even sales of the outgoing old S-class helped the bottom line.

“This solid second quarter is further evidence that Daimler finally has product momentum going strongly in its favour,” Morgan Stanley analyst Laura Lembke said.

Commerzbank analyst Sascha Gommel was also impressed by the 6.4 per cent profit margin, way above its forecast of 5.5 per cent.

“A better contribution margin from the small car segment (A/B/CLA), a strong start of the revamped E-class as well as a smooth phase-out of the S-class are major reasons for the strong performance. The model cycle is gaining momentum now and Daimler’s sequential recovery should continue at least until the fourth quarter 2013 with the full availability of the E-class facelift in the third quarter and the launch of the new S-class,” Gommel said.

Moody’s Investors Service, which analyses the long-term financial health of companies dampened the excitement when it announced a rate cut for Daimler, admittedly a day before the earnings news.

Credit metrics
“We have changed the outlook on Daimler’s rating to stable because the group’s credit metrics have eroded since 2011 to a level clearly below what would be needed to qualify for an upgrade (in its debt rating), as well as to reflect our expectation that within the new 12-18 months it will be unable to return to such metrics that would support a higher rating,” said Moody’s Senior Vice-President Falk Frey.

Frey conceded that the Mercedes new model programme was impressive, but didn’t see this translating into much of a financial boost any time soon.

“While Daimler’s performance has been relatively resilient lately and its pipeline of new model launches should help to counterbalance the ongoing challenges in Europe’s car market, we believe that the company’s financial performance will likely not improve sufficiently within the next 12-18 months,” Frey said.

Frey said Daimler’s ability to generate cash-flow had weakened significantly in the past few quarters and he doubted the company’s ability to generate sustainable positive free cash flow over the next two years. Mercedes ambition to become the biggest luxury car maker by 2020, and stricter government CO2 targets would impose a big capital spending burden.

Sequential profit increase
After Daimler announced preliminary second quarter profits, Deutsche Bank said it continued to see Mercedes Cars, and Trucks, at the start point of further sequential profitability increases.

A week earlier, the Bank had compared the margin improvement at Daimler with the deterioration at BMW as lower priced 3-Series cars dominated volume at the expense of the 7-Series, X5 and 5-Series. BMW’s profit margin would fall to 9.4 per cent in the second quarter from 9.9 per cent in the first, then drift down to 8.7 per cent in the third quarter before rising again to 9.3 per cent in the fourth quarter, the bank said. Meanwhile Mercedes margins would move from 3.3 per cent in the first quarter, to 5.3 per cent in the second quarter (compared with the actual outcome of 6.4 per cent) and on to 6.6 per cent and 7.6 per cent in the third and fourth quarter of 2013.

“In a sector where the trend is important, we think that this speaks to preferring Daimler over BMW. The absolute level of profitability is hardly a disaster at BMW, which remains well-run and profitable. It is just that it’s lacking either product/earnings momentum-something that Daimler has from an admittedly low base,” said Deutsche Bank.

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