Eurostoxx50: Daimler Chrysler
Description of the company Daimler Chrysler (DAI) is a global car manufacturer with a market share of 5%, leading the luxury car segment with its flagship brand Mercedes Benz. It also builds under this brand high tonnage trucks and it has speciality brands such as Smart and Maybach to serve niche markets. Their sales are divided into three key divisions and a support division (i) (Cars (Mercedes and Smart) which represents 25% of its sales; (ii) Trucks, with 23% of sales; (iii) Commercial Vehicles, with 12% of the sales; and, (iv) Financing, its support division, with 12% of sales.
Company strategy In 2007, with the sale of Chrysler, DAI made a strategic shift, setting up for itself two objectives: (i) to ensure that its brand Mercedes become world leader in its segment, (ii) to increase shareholder returns. During the crisis, DAI focused more on optimizing its cash flow and since 2010 it sought a more aggressive growth strategy, which resulted in upward revisions of its goal each quarter. Along these lines, the company announced a framework agreement for its joint venture (50/50 BAIC) in China which includes joint investments in the amount of €2bn to increase its production capacity in China in order to meet the growing demand for mid-high range in this market. At the corporate level, DAI will promote specific collaborations with other manufacturers (the creation of a JV with Rolls Royce and a takeover bid for diesel engine maker Tognum in March) as opposed to larger corporate operations. The key to its strategy will focus on the sale of assets in the medium term or its non-strategic participation in EADS (22.45%).
Latest results On October 27, Daimler published its 9 months’11 results which were below the estimates. The EBIT consolidated figure registered a fall of 19%, although in adjusted terms, the operating benefit of its business grew by 4%. Net profit fell for the first time since 2009 as result of increased costs associated with launching new models as well as the extraordinary ones associated with the value adjustment of its investments in Renault and Kamaz.
Company prospects In presenting the results for 3Q’11, it confirmed its guidance for the end of the year: (i) a growth in sales above the world market estimates (+5% – +7%) and an EBIT’11 higher than the one obtained in 2010 (€7.3bn). In addition, it reiterated its goal for 2013: (i) increased margin on sales for all divisions (10% for the Automobile division, Trucks 8% and 9% for Commercial Vehicles) and a 17% ROE in Financial Services; and, (ii) it pointed out that it expects sales for 2011 to significantly exceed €100bn, an objective that we consider to be attainable due to the strong momentum that Mercedes is experiencing at the moment and the expected recovery of the truck division. Given the company’s exposure to Asian and emerging markets (30%), we think that to the extent that the expectations of a soft landing in China increase, DAI sales should continue improving. Moreover, if we rely on the production figures and the sale of cars in the last quarter, the company’s results should be positive.
Conclusion Given the 22% of its revenues come from the truck division and we believe that this division is a strong catalyst in the sector for 2012, we think that DAI’s results this year will be positive and therefore the company should have a good stock market performance. To this, we should add that the German stock exchange has suffered a sharp fall as a result of the sustained pressure experienced by the European markets, so Daimler has become very attractive in its valuation (6.6x PER’12e vs. 12.2x PER’12e of the sector). If we also take into account its underperformance with respect to its peers (-35% in 2011 vs. -24% BMW and -19% Volkswagen) and the industry (-31% Stoxx 600 Cars), we think that a re-rating of the company could occur so we believe it could be a good investment in the medium/long term. In addition, we believe that its brand Mercedes benefits from its image as a strong brand with worldwide recognition that allows it to have a diversified geographic exposure.
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