DaimlerChrysler: A Lap Ahead
By Joann Muller with Christine Tierney
DaimlerChrysler's shares have been on a roller coaster lately, along with those of Ford and General Motors. That's not surprising: When jittery investors send one auto maker's stock plunging, the others' shares often fall too. All three saw declines of at least 20% in early October as Wall Street fretted about whether the car companies' massive pension obligations would eat up much-needed cash.
Although they have recovered in the past week -- DaimlerChrysler (DCX ) has climbed about $8, to just under $38 since Oct. 9 -- worries about pensions and the industry's overall health continue. But that's where the similarities among the three end. It's a mistake to assume the problems that plague GM (GM ) and Ford (F ) carry the same weight at their German-American counterpart. "Some of the things making people nervous about GM and Ford don't apply to DaimlerChrysler," says David Healy, auto analyst at Burnham Securities.
RISING RED TIDE.
For one thing, DaimlerChrysler's unfunded pension liability isn't nearly the black hole it is at GM. True, DaimlerChrysler's pension portfolio hasn't been immune to lousy stock market returns. But with approximately 100,000 retirees, Chrysler Group's pension obligations pale next to those at GM. Last week, the world's largest auto maker said its U.S. pension funds could be $23 billion in the red by the end of 2002, up from $12 billion at the end of 2001. Analysts estimate DaimlerChrysler's global pension liability at about $4 billion.
DaimlerChrysler reported third-quarter earnings on Oct. 23 of $881 million, higher than the consensus expectation of $710 million. That's more than triple the $281 million it earned in the same period a year ago, excluding one-time restructuring charges. Revenue rose to $35.9 billion from just under $35.6 billion a year ago. For the year, the consensus earnings estimate is $3.2 billion, according to First Call, up from $650 million a year ago.
Still, Chrysler, which lost $1.9 billion in 2001, isn't out of the woods yet, even though it's ahead of crosstown rival Ford on the recovery track -- if only because Chrysler's earnings meltdown came a year earlier. Costs at both companies had spun out of control in the late 1990s, but the issue surfaced first at Chrysler because of scrutiny of its 1998 merger with Daimler-Benz. Under pressure from investors to prove the merger wasn't a mistake, DaimlerChrysler executives have had a strong incentive to accelerate cost reductions and overhaul product-development processes.
By reusing existing parts and borrowing technology from Mercedes-Benz, Chrysler has reduced the cost of developing some new vehicles by up to 30%, says Richard Schaum, senior vice-president for product development. Such efforts have helped offset profit-sapping incentives like 0% financing, which have kept U.S. auto sales afloat through much of 2002.
The results have been impressive. "Chrysler has developed a pretty powerful rebound in its earnings to date," says credit analyst and Standard & Poor's Managing Director Scott Sprinzen. With the parent company's commercial truck business on the mend and its Mercedes-Benz luxury division remaining healthy even in a soft economy, "the overall earnings of DaimlerChrysler should be quite strong this year," says Sprinzen.
The third quarter is typically a weak period for the industry, as auto makers clear out inventory to create room for a new model year's vehicles. But analysts were optimistic about DaimlerChrysler because of a 13% hike in Chrysler's third-quarter production and the steady performance of Mercedes-Benz, despite the changeover this year of its most profitable model, the E-Class.
At an analysts' conference in Paris in September, CEO Jürgen Schrempp seemed upbeat, saying Chrysler's performance this year would be well above break-even. Overall, DaimlerChrysler now expects to exceed its own 2002 revenue forecast of roughly $140 billion.
AHEAD OF SCHEDULE.
The biggest turnaround has occurred at the Chrysler division, which accounts for 40% of DaimlerChrysler's revenue. That unit posted a $1.9 billion loss in 2001, excluding one-time restructuring charges. But thanks to aggressive cost-cutting and a stronger-than-expected auto market in the U.S., Chrysler was expected to post a modest profit for the quarter.
For the year, Chrysler should generate more than $1.2 billion in operating profit, excluding restructuring charges, estimates Patrice Solaro, Paris-based analyst at Julius Baer. That would mark a return to profitability a full year ahead of schedule under the three-year turnaround plan of Chrysler CEO Dieter Zetsche.
At Mercedes, sales have remained strong, despite the disruption of launching a redesigned E-class, the brand's biggest moneymaker. In September, Mercedes unit sales rose 10%, to 98,200. "They're benefiting from the rollout of the E-Class, which is close to a sure thing," says analyst Stephen Reitman at Merrill Lynch & Co. in London.
Even Daimler's troubled commercial-vehicles division, which continues to face long-term difficulties because of a recession in the trucking industry, should have a decent quarter. That's because of a surge in purchases of heavy trucks ahead of new U.S. environmental regulations for truck engines that went into effect on Oct. 1. And a restructuring at the U.S.-based Freightliner division is also starting to gain traction.
With an uncertain economy and threat of war with Iraq hanging over the stock market, analysts aren't urging investors to gobble up auto shares. And while many are encouraged by DaimlerChrysler's progress over the past year, the company still has much to prove.
Chrysler's U.S. market share has stabilized at around 13.5%, but that's a full percentage point below the goal laid out in its turnaround plan. And Zetsche wants Chrysler to sell an additional 1 million vehicles per year worldwide in the next 5 years to 10 years. That's an ambitious target, which is dependent on market acceptance of a new crop of vehicles that won't debut for another couple of years. With Chrysler continuing to face intense competition, especially from foreign manufacturers, "the uncertainty is pretty high," concedes Zetsche.
If incentives can keep the market humming along for another year and Chrysler maintains the pace of its impressive cost-cutting efforts until the new vehicles begin to roll off the production line, DaimlerChrysler shares could be attractive, according to analysts at JP Morgan. Until then, the roller-coaster ride is likely to continue for the Big Three.
Muller covers the auto industry for BusinessWeek in Detroit, and Tierney is a BusinessWeek writer based in Frankfurt
Edited by Beth Belton