Weak European Market And Slowing Chinese Sales Hobble Daimler’s Earnings

by Trefis Team
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Daimler AG
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Daimler AG (NYSE:DAI) announced its Q3 earnings as slowing vehicle sales in China and Western Europe caused the automaker to lower its full year profit forecast. Total revenue rose 8% to 28.6 billion euros helped by higher vehicle sales and currency gains. Most of the incremental revenues were attributable to North American revenues, which jumped 30% to 8.2 billion euros ($10.6 billion). Daimler’s net profit for the quarter stood at 1.2 billion euros ($1.55 billion) or 11% lower than the previous year quarter. [1]

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Profitability Hurt

Profitability remains an issue for the Daimler. Inventories rose 15% to 19.7 billion euros which could be a sign that the automaker is not selling vehicles at the desired rate which is putting a downward pressure on the pricing. The automaker’s operating profit fell 2% to 1.92 billion euros or $2.5 billion in spite of selling 1% more vehicles in the quarter. Mercedes-Benz has now delayed its target of achieving an operating margin of 10% by at least a year. The automaker also lowered its full year operating profit to around 8 billion euros, down from the previous guidance of 8.8 billion euros.

Daimler had already warned in September that adverse market conditions in Europe and a Chinese slowdown could dent its second half profits. The Chinese auto slowdown has resulted in car makers reducing prices and offering greater discounts to entice buyers. Added expenses related to new launches such as the A-class will also impact its short-term profitability.

During the earnings call, the management announced a new cost cutting program aimed to achieve a 2.0-billion-euro cost improvement by 2014. But Daimler has often been criticized in the past for its inability to deliver on its promises so it remains to be seen if the cost cutting measure will have the desired effect.

Chinese Figures Disappointing

The automaker sold a total of 2% more cars this quarter helped by a strong U.S. performance but offset by weak Chinese sales. Chinese data was a disappointment since the non-Japanese automakers were expected to benefit from a slump in the sales of Japanese automakers in the country. To accelerate its car sales in China, Daimler plans to increase the dealer networks in the country from 207 to  260 by the end of 2012 and at annual rate of 50 dealers from there on.

Mercedes-Benz has a limited number of vehicles in its portfolio and therefore plans to introduce 10 new models by 2015. The next generation C-Class should arrive in 2014 as well. Car sales in the fourth quarter could get benefit from the new A-class and GLK compact SUV, both of which were released earlier in the year.

Truck unit sales rose 3% in the quarter but are up 18% year-to-date. The slowdown in the truck sales was attributable to a declining truck market in China and an overall weak European market. Daimler’s Chinese revenues contracted 18% in the quarter. Sales in the fourth quarter are likely to remain weak as the automaker forecasts a double digit decline in the Chinese truck sales for the full year.

Daimler also introduced its first set of trucks in India under the brand BharatBenz late in September. Although the sales will not have a significant impact on the earnings in the short term, they are likely to become an important revenue stream for the automaker in the coming years. Under this brand, Daimler will roll out 18 new models, designed specifically for the Indian roads, in the next 18 months. To build the line of trucks, it has invested $850 million in a facility in India, which is the company’s largest investment outside of Europe.

We have a price estimate of $61 for Daimler’s stock, but we are in the process of revising our estimates to incorporate Q3 earnings.

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Notes:
  1. Daimler Q3 earnings []
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