EUR 850.00 For Business Accounts Only

Morningstar | Daimler Reports Disappointing 3Q Results; Maintaining EUR 85 FVE

No-moat-rated Daimler reported third-quarter earnings per share of EUR 1.58, down EUR 0.43 compared with the prior year and missing consensus by EUR 0.15. However, weak third-quarter results were expected after preliminary EBIT results and reduced guidance were announced last week. Underperformance was attributable to the new EU emission certification process that increased cost and reduced availability of certain models in Europe as well as a provision taken for a European Court of Justice ruling on previously used refrigerant R134a.

Group revenue for the quarter declined 1.3% to EUR 40.2 billion from EUR 40.7 billion last year. However, group EBIT dropped 27.0% to EUR 2.5 billion from EUR 3.4 billion in the third quarter of 2017. The year-over-year decline was led by the Mercedes-Benz car group, with a 34.8% drop in EBIT to EUR 1.4 billion from EUR 2.1 billion reported a year ago. The truck group partially offset EBIT declines with a 38.4% spike in EBIT to EUR 850 million for the quarter versus EUR 614 million in the same period last year, attributable mainly to healthy U.S. demand for heavy commercial vehicles.

In the near term, the stock may come under additional selling pressure as 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 a compelling 40% 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%. 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 an EUR 85 fair value estimate that represents a 28% premium to the EUR 65 consensus price target and 66% upside potential versus the current market valuation.