Stock of the week: Daimler

Summary:

• Daimler secured €20 billion EV battery cell deal

• New rules in EU and China make automobile companies focus more on electric vehicles

• Demand in China remains robust and Daimler is expected to meet newly imposed quotas

• Daimler’s (DAI.DE) stock declined significantly this year

2018 was far from good for the European car industry. Trade wars led to issuance of a few profit warnings while probes related to diesel scandal undermined investors’ sentiment. Increased global awareness of the impact carbon dioxide has on environment makes developing of electric vehicles a must for automobile companies in order to survive. In this analysis we will take a look at how Daimler copes with this major shift in the automobile industry.

Unsurprisingly, Daimler’s revenue is to high degree correlated with the number of vehicles sold. Note that the latest drop in car sales was followed by similar decline in revenue and net profits. Source: Bloomberg, XTB Research

More and more regulatory agencies around the World take action to bolster shift towards more environment-friendly vehicles. Just recently ministers of the European Union member countries agreed on new carbon dioxide emission targets for trucks. Politicians want car companies to reduce CO2 emission of their trucks by 30% by 2030 with 15% interim target by 2025. However, prior to implementation the limits will be discussed with the European Parliament that opts for even stricter measures. Whichever option will prevail automakers will have to go to the great lengths to meet new targets. Having said that, it is likely that manufacturers will focus on type of cars to produces virtually no carbon dioxide - electric vehicles (EV). Numerous automobile sector firms already are researching and developing EV models. Daimler recently announcing a €20 billion battery cell deal extending to 2030. The company said that the deal is a part of gearing up for mass production of electric and hybrid cars.

While growth of Daimler’s global car sales staggered as of late the expansion in China remains robust. Sales in China already account for almost a quarter of the company’s global sales and are projected to increase further. Source: Bloomberg, XTB Research

As China is the most heavily populated country in the World it is also the World’s biggest market for cars. This is especially true after the latest efforts of the Chinese authorities to open its market and allow greater presence of the foreign firms. The importance of this region can be easily seen while looking at financial statements of Daimler. In the first quarter of 2010 less than 7% of all vehicles sold were sold in China. This number grew to over 22% in the third quarter of 2018. However, this figures relate to sales of all types of cars. While the specific data on sales of EVs in China is not easily available one can assume that electric vehicles’ sales will accelerate in the years to come. This is because of new quotas imposed on car makers by China. Namely, Chinese authorities want New Electric Vehicles (electric and hybrid vehicles) to account for at least 10% of all vehicles sold in China starting from 2019. Moreover, this threshold will increase each year until 20% cap is reached. The 8% quota for 2018 was removed but chief of Daimler’s Chinese branch said that the company would most likely achieve it anyway. As the outlook for Chinese business remains positive (demand is expected to remain robust) and the company plans to launch EV production in China next year, Daimler may be one of the biggest beneficients of the ongoing shift towards EVs.

Daimler’s selected financial data for 2010-2017 period. Source: Bloomberg, XTB Research

Daimler managed to expand greatly in the 2010-2017 period. Revenue grew by almost 70% in that period while earnings (EBITDA and EBIT) increased around 80% each. Net income in 2017 was over twice as big as in 2010 and the same can be said about company’s EPS ratio. In turn Daimler experienced a 40% boost in market valuation. Significant increase in the capital expenditures also bodes wells for the future as it shows that company continues to conduct investment projects. Higher current and quick ratios at the end of the period show that Daimler managed to improve its liquidity position and become somewhat more resistant to economic stress. On the other hand, turnover ratios can be seen as a worrying sign as all three measures (inventory, receivables and payables) increased. While increase in payables turnover is an optimistic sign, a jump in the other two metrics more than offsets it. Last but not least, the company’s leverage increased in the 2010-2017 period but it still remains within industry norms.

Comparison of Daimler and its main peers. Source: Bloomberg, XTB Research

In the table above one can find selected financial data from Daimler as well as its main rivals: BMW, Ford and Volkswagen. According to 2017 margins Daimler looks more profitable than its major peers. The company also generates above-average return from its assets while return from equity is in-line with industry norms. Current and quick ratios also show that the German carmaker has better liquidity position than other companies presented in the table. Sales remain robust with 1-, 2- and 3-year revenue growth figures easily outperforming industry averages and medians. Daimler’s leverage seems to be slightly higher than median for the industry. One thing of concern is Daimler’s inventory management. The company has the second lowest inventory turnover in the peer group what may hint at abundant stockpiles. To sum up, Daimler looks superior to its peers in most of the presented metrics.

Daimler (DAI.DE), just like other carmakers, had a tough time this year. Company’s stock trades 36% lower YTD and tests the €46.40 handle at press time. However, an ongoing shift towards electric vehicles may help boost the sentiment. Source: xStation5