Daimler AG scrapped a Mercedes-Benz earnings target for the second time, highlighting the luxury-car brand’s widening gap to leader Bayerische Motoren Werke AG.
Chief Executive Officer Dieter Zetsche gave up on boosting Mercedes profit margin to at least 10 percent of sales next year, a level that Volkswagen AG’s Audi beat in the third quarter. The earliest Mercedes will achieve the target now is 2014, four years later than originally planned.
“In light of the relative strength of VW and BMW, I’m simply shocked by the weakness of Daimler,” said Arndt Ellinghorst, a London-based analyst with Credit Suisse. “The management of Daimler is disappointing once more.”
Burdened by a disjointed strategy in China, sluggish expansion of entry-level models and an aging S-Class sedan, Mercedes has slipped deeper into third place. The gap in sales to BMW this year jumped 41 percent, while Audi more than doubled its lead over Mercedes, casting doubt on Zetsche’s pledge to retake the lead in deliveries and profit in the segment.
Burdened by costs to expand its model lineup and tougher competition in Europe and China, Daimler’s third-quarter earnings before interest and taxes slipped 2 percent to 1.92 billion euros ($2.5 billion), the company said late yesterday. Mercedes Ebit fell 12 percent to 975 million euros, even as sales climbed 10 percent.
That meant the Daimler unit’s margin dropped to 6.4 percent from 8 percent a year ago. Audi reported a margin of 10.5 percent last quarter, while BMW is forecasting an auto margin at the “upper end” of a range of 8 percent to 10 percent. BMW releases third-quarter earnings on Nov. 6.
“They need to improve in every area,” said Albrecht Denninghoff, an analyst with Silvia Quandt Research in Frankfurt. “In the direct comparison with Volkswagen and BMW, they fall clearly behind.”
Daimler fell as much as 4 percent to 36.31 euros, the lowest price since July 24, and was down 2.4 percent as of 4:12 p.m. in Frankfurt. The stock has gained 8.7 percent this year, valuing the German carmaker at 39.4 billion euros. VW has surged 34 percent in 2012, while BMW has climbed 18 percent.
In September 2011, Zetsche sought to cap the celebrations for the automaker’s 125th anniversary by setting the goal for Mercedes to become the No. 1 upscale car brand by the end of the decade, reclaiming the spot it lost to BMW in 2005. At the time, he said it was “impossible” for the brand to accept being third. A year later, the tone is more muted.
“We have one of the oldest product portfolios compared to the competition,” Chief Financial Officer Bodo Uebber said today. “We can’t catch up this year to BMW and Audi.”
To prevent a further slip in profitability, Daimler plans to cut costs at Mercedes by 2 billion euros by the end of 2014 under a program dubbed “Fit for Leadership.”
The measures, which include actions previously initiated, will reduce material, production and fixed costs and cut back on research and development and capital spending, with the aim of safeguarding earnings levels in the short term.
“All expenses are under review,” Uebber said. Still, the company aims to keep its dividend “stable,” after paying out 2.20 euros a share last year, he said.
Daimler, also the world’s largest commercial-vehicle maker, lowered its forecasts for 2012 profit as well yesterday. The company now expects Ebit to fall 11 percent to 8 billion euros, after a previous target of matching last year’s 9 billion euros.
The car business is expected to decline 15 percent to 4.4 billion euros, while truck Ebit will fall 10 percent to about 1.7 billion euros.
The scrapped 2013 targets called for Mercedes to earn a margin of 10 percent and trucks 8 percent. Zetsche, who originally planned to hit those marks in 2010, first delayed the targets in February 2009 in the midst of the financial crisis. Daimler now said it will meet the goals at “a later date.”
“I’m surprised that they are holding on to their long-term goals,” said Frank Schwope, an analyst with Hanover-based Norddeutsche Landesbank Girozentrale. “These are implausible and will never be reached.”
Daimler’s strategy to catch up in luxury cars is based on introducing 10 new models by 2015, including additional variants of the S-Class, which will be overhauled next summer. The company targets sales of 1.6 million Mercedes brand cars by 2015, 25 percent more than last year.
Daimler expects car sales to increase in the fourth quarter on rising demand for its new A- and B-Class compact models and its sport-utility vehicles. Earnings will be subdued by a “high double-digit” million-euro amount to support its Chinese dealer network, Uebber said.
Mercedes has been trailing in China, where deliveries edged up 6.7 percent this year, compared with gains of more than 30 percent for BMW and Audi. To improve its fortunes, Zetsche is combining two separate sales units -- one for imported vehicles and one for locally made cars -- into a single entity.
“Daimler seems an unusually unlucky company,” said Max Warburton, an analyst with Bernstein Research. “Investing in the hope that its luck will change is probably not a great idea.”