Auto shows, like the one in Frankfurt this week, are usually the time for executives to display their most alluring wares and point toward an evermore illustrious future.
Odd then that Daimler AG decided Monday was the right time to get all gloomy. To be clear, profit at the Mercedes-Benz brand is just fine and dandy for now. The parent is expected to report almost 10 billion euros ($12 billion) of net income this year, a level that only four other western European companies might exceed, according to Bloomberg data.
Yet Daimler's management is cautious about what the capex, R&D and components spending associated with launching 10 purely electric cars will do to its bottom line (unless it takes remedial action). Judging by Monday’s presentation, it might not be quite the nightmare imagined by investors.
Stirred into action by Tesla Inc.’s sales success, plus various government announcements that seem to herald the combustion engine's demise, Daimler is going “all in” on electric vehicles. It’s not alone. The world’s carmakers are engaged in a public relations battle to appear the most ambitious. Volkswagen AG promises all 300 of its models will have an electric option by 2030.
That’s wonderful for the planet, but a bit of a worry for profit. After dragging their feet for years, carmakers suddenly look a little like lemmings, leaping off a cliff into the great electric unknown. Right now, I doubt they make much money from electric vehicles. Tesla sure loses plenty.
VW has earmarked 50 billion euros for batteries for its electric cars, which it promises will comprise one quarter of sales by 2025. Fingers crossed someone can supply them in time and at reasonable cost. While battery costs are falling, miners like Glencore Plc warn of a supply squeeze for ingredients such as cobalt.
So what’s the damage at Daimler? It thinks some of its electric cars will be only half as profitable as combustion engine models, at least at the start. Thus Mercedes-Benz's operating margin might dip from about 10 percent toward 8 percent after 2019. But because Daimler plans to cut about 4 billion euros in yearly costs and expects more vehicle demand, operating profit should keep rising on an absolute basis.
If that’s the extent of the blow from its electric splurge, investors should be ecstatic. Instead, they seem to think management is dreaming. The company trades on just seven times estimated earnings and the shares yield 5 percent. That’s implied dividend cut territory.
Indeed, that Daimler still pays out 40 percent of net income to shareholders is either the height of recklessness, or a sign its car business isn’t in fact a dodo. I’d err toward the latter.
Yes, Daimler and its fellow auto giants are late to the electric party and carry plenty of baggage. They may not need so many employees in future. Volkswagen’s workforce is 35 times bigger than Tesla’s. But deep pockets help when you’re betting big: Daimler has about 25 billion euros of cash and short-term investments.
In contrast, while Tesla’s enterprise value exceeds Daimler’s, it’s never paid a dividend. If it ever makes a profit, that will just pay for more growth. Analysts don’t expect a Tesla profit until about 2019 and by that time Daimler, Audi, Porsche and others will have started their electric offensive.
Unlike the Frankfurt show, the shift to electric vehicles won’t be a beauty parade: It's going to be ugly for some. Daimler’s sitting prettier than most.
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