Morningstar | DAI Updated Forecasts and Estimates from 27 Aug 2018
No-moat-rated Daimler reported second-quarter earnings per share of EUR 1.61, a 29% drop from the prior year but also EUR 0.18 below the consensus EPS of EUR 1.79. Underperformance was attributable to negative currency translation, a new EU emission certification process that increases cost, changes in China tariffs, and an arbitration settlement. Industrial revenue declined 2% while industrial EBIT margin (excludes China JV equity income) contracted 180 basis points to 6.7%.Even so, management confirmed 2018 guidance that was updated earlier during the second quarter. Daimler does not provide specific number guidance, but the direction of car volume is expected to be even with 2017 while trucks, vans, and buses are forecast to be significantly higher. EBIT is expected to be slightly below EUR 14.7 billion reported last year. Management attributes full-year profit pressure to increased tariffs of U.S.-made vehicles exported to China, the costlier emission certification process, a diesel recall of Mercedes Vans, and weaker bus demand in Latin America.
We also note that Daimler's second-quarter profits were negatively impacted by EUR 418 million for the Toll Collect arbitration settlement. Toll Collect is a consortium run by Daimler and Deutsche Telekom that operates a satellite-based truck toll system in Germany. A dispute arose between the JV partners and the German government on project delays and cost overruns.
In our opinion, the 4-star rated shares of Daimler offer investors compelling valuation. Uncertainty remains due to U.S. tariff policies and ongoing EU investigations into diesel collusion. We also believe the market has discounted the stock for higher investment needed in industry disruptive technologies including mobility services, autonomy, and powertrain electrification, which our fair value already takes into consideration. Daimler stock currently trades at an attractive 30% discount to our EUR 85 fair value estimate.
During the past 10 years, Daimler's EBIT margin has had a high, low, and median of 8.8% (2016), negative 2.9% (2009), and 6.9%. For 2018, we model Stage I peak EBIT margin at 7.9%, which represents a 50-basis point contraction from 2017. Our margin assumptions decline through Stage I to our normalized sustainable midcycle assumption of 5.6% in year five. Our midcycle assumption represents a 70 basis-point contraction versus Daimler's 10-year 6.9% historical median. Despite our assumptions for significant margin pressure, our DCF model still generates a EUR 85 fair value estimate that represents a 16% premium to the EUR 73 consensus price target and 43% upside potential versus the current market valuation.
Daimler provides a range of transportation products, including passenger cars and commercial vehicles, and also financial services. Co. operates in five segments. Mercedes-Benz Cars sells passenger cars and off-road vehicles under the Mercedes-Benz brand and small cars under the smart brand. The Daimler Trucks distributes its trucks (Mercedes-Benz, Freightliner, FUSO, Western Star, Thomas Built Buses and BharatBenz). The vans of the Mercedes-Benz Vans segment are sold under the brand name Mercedes-Benz and Freightliner. Daimler Buses sells completely built-up buses (Mercedes-Benz and Setra). The Daimler Financial Services division supports sales of Co.'s automotive brands.
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