EUR 850.00 For Business Accounts Only

Morningstar | DAI Updated Forecasts and Estimates from 28 May 2019

No-moat Daimler, the maker of Mercedes-Benz cars, trucks (Freightliner in the United States), vans, and buses, reported diluted earnings per share of EUR 1.96, down EUR 0.16 from the year-ago period but EUR 0.18 higher than the consensus EPS of EUR 1.78. We expected the underperformance versus the prior year due to softer unit sales and the changeover for certain models reducing availability. Even though unit volume declined 4.1%, including China joint ventures, industrial revenue was down only 2.1%, indicating healthy pricing and mix.

Even so, management tweaked 2019 guidance slightly lower due to softer U.S. demand in the Mercedes car group and due to underperforming van operations. Daimler changed its language regarding the U.S. market for Mercedes cars to a "slight" decrease, down from "around" the prior year’s level. However, global Mercedes car group unit sales guidance was unchanged at "slightly" higher for the year. While all other 2019 group EBIT margin targets were confirmed, van group EBIT margin guidance was dramatically lowered to 0% to 2% from 6% to 8%. Management attributed the change to its decision to stop producing the X-Class in Argentina. First-quarter van group EBIT was a loss of EUR 98 million versus the consolidated total EUR 2.8 billion. We had already been assuming margin pressure in our Stage I forecast with 2019 EBIT margin forecast at 6.5%, the low end of guidance, so there was no impact on our fair value estimate.

In our opinion, the 4-star-rated shares of Daimler offer investors compelling valuation. Uncertainty remains surrounding the ongoing European diesel collusion charges, declining European diesel demand, and higher investment needed in industry-disruptive technologies, including mobility services, autonomy, and powertrain electrification, all of which our fair value estimate already considers. Daimler's stock currently trades at an attractive 32% discount to our EUR 85 fair value estimate.

Daimler's industrial revenue was EUR 32.8 billion, down 2.1% compared with EUR 33.5 billion reported a year ago. However, non-JV vehicle volume in China increased 14.3%, commercial truck volume modestly rose 1.8%, and van volume was up 4.3%. These volume increases were offset by a 12.2% drop in the Mercedes car group and a 3.8% decline in bus volume, for a total volume decline of 4.1%. The 2.1% decrease in industrial revenue was led by a 7.8% drop in the car group and a 7.6% decline in bus, partially offset by a 10.8% jump in the commercial truck group and an 8.7% increase in van revenue.

Including China JV equity income, adjusted operating margin dropped 330 basis points to 5.4%. Daimler's JV, Beijing Benz, contributed EUR 316 million, down 4.8% versus the year-ago EUR 332 million reported. Adjusted operating margins for the van and bus groups were disappointing. Van group margin contracted 8.5 percentage points to a 2.9% loss on 8.7% higher unit volume, while bus group margin contracted 7.0 percentage points to a 2.7% loss on a 7.6% decline in units. Management attributed the losses to Argentina in the van group and delayed bus deliveries caused by the emissions certification process in Europe, resulting in 700 fewer buses delivered in the first quarter.

Even so, we were encouraged by the margin performance of Mercedes-Benz cars and the truck groups. Despite the 12.2% drop in volume, the car group posted a 290-basis-point contraction in adjusted operating margin to 6.1% from 9.0% last year. Truck group adjusted operating margin contracted 140 basis points to 6.1% from 7.5% reported a year ago due to 8.9% and 18.1% volume declines in Asia-Pacific and rest of world regions, partially offset by positive operating leverage from 10.0% and 17.2% increases in Europe and NAFTA region volumes.