Daimler Impresses Investors With Profit Plan, But A Stumble Would Revive Takeover Talk

Investors seem happy after Mercedes parent Daimler announced new goals to slash costs, cement profit targets, move upmarket and build up its electric car portfolio to try and keep up with Tesla
TSLA
and Volkswagen.

Any sign these targets are receding into the distance will revive merger and takeover talk, which recently involved Renault-Nissan, BMW and Geely of China.

The idea that Mercedes was moving upmarket might puzzle some investors who’d assumed that was where it was now, but it will likely mean cutting out some models at the bottom of its price range, while concentrating on high margin vehicles carrying the Maybach, AMG, and G-Wagon labels. Models under scrutiny probably include the A-Class hatchback and sedan and  the B-Class minivan, but Mercedes gave no details at a strategy update meeting.

Investors liked the plan, and Daimler shares resumed their uptrend which has seen the price gradually build from a coronavirus induced low of €22.06 in March to a high of €46.58 a few days ago. The shares dipped a bit ahead of the meeting Tuesday, but resumed their uptrend Wednesday to just over €48.

Daimler said the target was a double-digit profit margin by doubling sales of Maybachs, AMGs and G-Wagons.

This is an urgent requirement for a company which reported a 2^nd quarter operating loss of €1.68 billion ($1.95 billion) in July and a 1^st-half net loss of €1.7 billion. At the time, Daimler said its Mercedes division would report a rise in operating profit in 2020. Earlier this month Daimler agreed to pay $2.2 billion to resolve a U.S. government diesel emissions investigation and claims from 250,000 U.S. vehicle owners. Last month ex-Daimler CEO Dieter Zetsche announced he would not take up his expected appointment as chairman on March 31, 2021, so that’s another big decision the company must take.  

Higher portfolio profitability

At the meeting Tuesday, Daimler Chief Financial Officer Harald Wilhelm spelled out the new strategy.

“We will pursue higher portfolio profitability, we will steer by contribution margin, we will move the existing portfolio margin up and move capital to luxury and high-end products,” Wilhelm said.

Investment bank UBS described the plan as aggressive.

“Key highlights were a more aggressive EV rollout, a luxury-centric strategy utilizing the sub-brands AMG, G and Maybach including a much stronger focus on contribution margins versus sales volume, and a clear commitment to reduce investments and fixed costs by 20% in 2025 compared with 2019,” UBS analyst Patrick Hummel said.

“The envisaged 2025 EBIT (earnings before interest and tax) margin of 6-8% even in a challenging environment seems realistic on the back of the announced cornerstones, but will heavily depend on Mercedes’ ability to close the product and technology gaps in EVs,” Hummel said.

Daimler told the meeting, next year it will start producing vehicles on its new Electric Vehicle Architecture (EVA) for large cars and SUVs, starting with the EQS sedan and followed by the EQE sedan, EQS and EQE SUVs. The Mercedes Benz Modular Architecture (MMA) will be used for compact and midsized electric vehicles. This will compete with VW’s smaller new generation electric vehicles led by the ID.3, currently on sale across Europe.

Investment researcher Jefferies liked Daimler’s focus on improved capital allocation, product priorities and cost cutting goals.

Behind the scenes pressure

“We continue to like the capital efficiency of Daimler “under new management” with signs of improvements in Trucks and governance also supportive,” Jefferies analyst Philippe Houchois said.

Zetsche’s decision to stand down was the result of behind-the-scenes pressure from some big investors.

Bernstein analyst Arndt Ellinghorst was impressed too.

“The strategy update was a step in the right direction as it delivered a clear message on brand-equity and financial ambition. Lowering fixed costs, CAPEX and R&D budgets each by 20% is a big deal and a message that investors should take seriously,” Ellinghorst said.

Earlier this year when Daimler was rocking from financial hits and its global sales were diving following the coronavirus crisis, some investors were suggesting the company might be forced into a merger.  

3 options

Analysts pointed to 3 options. A German-German solution with BMW, a German-French-Japanese solution with shareholder Renault-Nissan, and a German-Swedish-Chinese solution with the major shareholder China’s Geely Automobile Holdings Ltd, and its subsidiary Volvo.

Merger talk has subsided recently, but if Daimler stumbles, takeover-talk will soon crank up again.