EUR 850.00 For Business Accounts Only

Morningstar | Daimler Reports Headline Numbers, 2018 Results Mixed, Full Release Expected Feb. 7

No-moat rated Daimler, maker of luxury Mercedes brand cars, Mercedes trucks, vans, and buses, as well as Freightliner and Western trucks in the U.S., provided the media with its headline 2018 results at a press conference in its headquarters in Stuttgart Germany on Feb. 6. Full-year results were roughly in line with our expectations as consolidated revenue increased 2% and earnings before interest and taxes dropped 22%. An investor conference and the release of full financial statements is scheduled for Feb. 7.

In our opinion, Daimler stock is undervalued due to the potential impact in 2019, of transient issues. Higher raw material costs, the possibility of a no-deal Brexit, other international trade tensions, declining diesel passenger vehicle demand in Europe, and an EU diesel collusion investigation have weighed on Daimler's valuation. We also believe the market has unfairly discounted the stock for higher spending on mobility services, autonomy, and powertrain electrification, which our fair value estimate already takes into consideration. We view the above issues as temporary, not influencing our normalized sustainable midcycle assumptions. The attractively valued 4-star rated shares of Daimler currently trade at a compelling 40% discount to our EUR 85 fair value estimate.

During the past 10 years, Daimler's industrial EBIT margin has had a high, low, and median of 8.8% (2016), negative 2.9% (2009), and 6.9%, respectively. We model five-year Stage I industrial EBIT margins that average 6.8%. Our margin assumptions decline through Stage I to our normalized sustainable midcycle assumption of 5.0% in year five. Our midcycle assumption represents a 190-basis-point contraction versus Daimler's 10-year 6.9% historical median.

The preliminary results are dramatically mixed. Fourth-quarter and full-year record consolidated revenue of roughly EUR 46.6 billion and EUR 167.4 billion (includes financial services), represent approximate 7% and 2% increases compared with the previous year, respectively. Full-year unit sales volume for the Mercedes-Benz car, commercial truck, and vans were roughly in line with our expectations, with a minor increase for car, 10% higher truck volume, and a 5% increase in van units.

Despite record consolidated revenue and volume levels, adjusted EBIT (excludes financial services and special items) was anemic, as we had expected. Fourth-quarter and full-year adjusted EBIT were EUR 2.5 billion and EUR 9.8 billion,respectively. The adjusted EBIT results represent a 180-basis-point contraction to 6.4% for the quarter but a full-year 190-basis-point contraction to 6.9%. A new, costlier emission certification process in Europe that distorted pricing and volume in the region, along with higher spending on autonomy and powertrain electrification, plus higher raw material costs, were the primary contributors to Daimler's weak margin performance.