DAIMLER: IS BIG AUTO BOUNCING BACK?
15th November 2021
Share Price: €87.89
Dividend Yield: 1.54%
P/E Ratio: 6.8 times
It has been a tough few years for the auto sector. The industry has had to contend with the emissions scandal, first emerging at Volkswagen but later tainting many of its rivals also. And of course, the massive disruption caused by the transition to electric vehicles. On top of that, the recent shortage of semi conductor chips caused by the closure of factories during Covid lockdown has restricted production.
However, the charts for most of the auto stocks have rather suddenly turned positive. Are these wounded giants bouncing back at last? Have they finally caught up with Tesla in producing new electric models that appeal to the car buyer?
Daimler whose best known marque is the Mercedes-Benz car, is restructuring its operations. It recently announced that it will spin off its trucks division Daimler Truck on December 10. Daimler Truck aims for electric trucks to be 60% of turnover by 2030, and it has produced its first e-truck, the eActros. It costs three times more than the diesel equivalent, so it remains to be seen if it will sell, because the reduced running costs are unlikely to make up the total difference in cost.
Daimler will retain a 35% ownership stake in Daimler Truck after the spin off of the latter whose shares will trade on the Frankfurt market. Daimler shareholders will receive one Daimler Truck shares for each Daimler share held.
Following the spin off of Daimler Truck, Daimler will change its name to Mercedes-Benz Group in February 2022, emphasizing its new focus on that marque.
Daimler has also largely unwound its alliance with Renault and Nissan, by selling all of its shareholding in the former and most in the latter. In addition, Renault and Nissan have sold down their stake in Daimler. Several of the projects undertaken with Renault-Nissan had a poor outcome, and the latter is in some disarray following the arrest in Japan of its former CEO Carlos Ghosn (who skipped bail and managed to get out of Japan by hiding in a box of musical equipment on a private jet bound for Lebanon).
Daimler's CEO has said that the fact that it caters to a luxury customer base makes it easier to transition to electric vehicles, compared to the mass market operators. Daimler is one of six car manufacturers that has committed to phasing out petrol and diesel cars by 2040.
Daimler has navigated the chip shortage quite well by focusing on its most profitable model the S Class Sedan, and prioritizing its chip requirements over the other models. Also, the cost cutting measures done in the past few years appear to be bearing fruit, as the net profit margin for the Mercedes division is expected to be between 10% & 12% this year, which would be its highest for many years.
Daimler looks to have a strong position in China, which has been the biggest auto market in the world since 2009. Its car sales in China increased by 12% in 2020, despite the pandemic, to a record 774,000. This was far ahead of German sales of 286,000 and US sales of 275,000. Daimler has very large manufacturing plants in Beijing and Shanghai, and 80% of its Chinese car sales were made in China.
In September, Daimler announced that it would take a stake of 33% in Automotive Cells Company (ACC), a battery cells maker that was set up in 2020 by TotalEnergies and Stellantis (Fiat & Peugeot). It also has a supply agreement with ACC, and this will greatly assist in plans to convert exclusively to electric vehicles by 2040.
Currently trading at €87.89, which puts the shares on a historic P/E of less than 7 times earnings, the shares look excellent value. The chart indicates that the bear market for this stock has come to an end, there is a good plan in place for the transition to electric vehicles, and the high exposure to the Chinese market is arguably another very positive feature of this stock.