Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Investors might not admire Daimler quite as much as buyers seem to love its cars. But a 13 percent jump in quarterly net profit shows the Mercedes-maker in reasonably fine fettle. The car unit achieved an 11.8 percent return on sales in the latest three-month period, almost double what it was four years ago.

Mercedes' Margins
Daimler's car-making unit is much more profitable than four years ago
Source: Bloomberg
Nb. Operating margins in early 2016 were impacted by the Takata airbag recall

I could bore you with a long technical explanation about how that transformation came about. But it really boils down to Mercedes-Benz previously making cars like this:

PHOTO: Mercedes C-Class Car

And now making cars that look a bit more like this:

Product lines are sometimes overlooked when looking at the fortunes of carmakers. Yet better design and expanded ranges let Mercedes charge more for vehicles, build market share and appeal to younger buyers. Mercedes-Benz is outselling arch-rival BMW this year, while sales in China jumped 20 per cent in the third quarter. 

Unfortunately, financial markets aren't in the mood to give much credit for this reinvention. Investors are too worried about cyclical and structural problems facing the entire automotive industry. This long list includes a slowing U.S. car and truck market, a Chinese debt bubble, the vast cost of being emissions compliant and the threat from Uber and other ride-sharing apps.

As a result, price to earnings multiples have shrunk across the sector, even for relatively solid prospects like Daimler.

Multiple Contraction
Shareholders aren't willing to pay up for auto stocks, even for ones performing well, like Daimler
Source: Bloomberg

The one genuinely sore spot for Daimler is its truck unit, where sales and earnings are falling, largely because of that weak demand in North America. But so long as car sales remain okay, this should be manageable for Daimler. Trucks accounted for less than a quarter of group revenues last year and less than a fifth of operating profit. 

Even so, Daimler isn't helping itself by increasing capex and R&D spending this year, having been relatively parsimonious in the past.

That's reinforced the impression that today's high profitability at Mercedes doesn't mean bumper cash flows. Free cash flow at Daimler's industrial business almost halved in the first nine months of 2016 compared to the same period a year ago.  It expects the yearly total to be much lower than in 2015. 

The shares peaked more than a year ago and the warning on Friday that full-year revenue would be flat because of the U.S. truck slowdown added to fears that Daimler's best days are behind it. It's right to invest in its future, of course, but shareholder worries about the automotive cycle are understandable too. More attention to cash flow, through better cost control, could convince them that Daimler's future isn't quite as ugly as its cars once were. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This is partly due to a one billion euros anti-trust fine but higher investments also played a role.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net