Morningstar | Daimler Reduces Guidance, Reports Preliminary EBIT for 3Q18; Maintaining EUR 85 FVE
No-moat-rated Daimler announced guidance reduction for the full year 2018 and preliminary EBIT results for the third quarter. The announcement disappointed the market but was not completely unexpected, taking the shares down by only 2%. Underperformance was attributable to the EU emission certification process that increases cost and a provision taken for a European Court of Justice ruling on previously used refrigerant R134a. Group EBIT for the quarter dropped 27% to EUR 2.5 billion versus EUR 3.4 billion in the third quarter of 2017.Management reduced 2018 guidance with the underperformance in the preliminary third-quarter results. Daimler does not provide specific number guidance, but 2018 group EBIT is now expected to be significantly below the year-ago results versus prior guidance for a slight decrease. We had already been forecasting a EUR 500 million decline in 2018 compared with the prior year but took our estimate down another EUR 500 million to EUR 10.8 billion compared with EUR 11.8 billion in 2017.
In our opinion, the 4-star-rated shares of Daimler offer investors compelling valuation. Uncertainty remains due to U.S. tariff policies, declining European demand for diesel powertrain passenger vehicles, 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 40% discount to our EUR 85 fair value estimate. Due solely to the change in currency translation since our last update, we lowered our fair value estimate on the U.S. ADRs to $98 (USD $1.1539/1 EUR) from $104 (USD $1.2295/1 EUR).
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 7.7% in 2019, which represents a 70-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 25% premium to the EUR 68 consensus price target and 65% 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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