Companies Focus – VM Basic Assessment (Part 1) - Reviewing the Fundamentals

The intention of this next two part weblog is to review the investment / investor standing of the world's best known auto-manufacturers.

Part 1 (herein) provides a “basic view” by using the standardised 'fundamentals' measure of the price-earnings calculation.

Part 2 (to follow) provides an “advanced view” by examining each companies' 'fundamentals' in greater detail. Through the construction of four graphs which depict the investment-auto-motives' perspective of 'coupled ratios'. This marrying two standard 'ratio' measures to better assess: a) Market Valuation, b) Profitability, c) Liquidity d) Debt.


The Global 'Macro' Picture -

By measure of international bourses, the global economy continues to 'shudder and shake' as a mix of very cautious macro sentiment mingles with what seem rapid 'risk-on, risk-off' equities vs bonds actions creating volatility.

In the USA, a much altered QE policy structure took the wind from the stock-market's sails, the presidential campaigning highlighting President Obama's desire to avert economic focus, whilst Romney obviously seeks to. The USA's previously strong bullishness has wained, America's prime indices the Dow Jones and NASDAQ illustrated that much turned mood. The DJ gave-away a sizeable 1000 points plus drop between its recent peak of 1st May and trough-bottom on 4th June, though has regained approximately half that lost value since. The NASDAQ peaked 26th March and bottomed on 4th June, showing a 366 point loss, and has regained a fifth or so of that loss since. So whilst the encouraging 'bottom-bounce' provides more confidence, the full extend of its strength is yet to be seen.

Europe of course continues to be blamed as the instigator of ongoing global economic drag. (Most notably as the prime disruptor of US prosperity, a bad citation by Obama given the EU's relatively small intake of US exports). However, the sovereign debt crisis continues to fester, the liquidity demands of the PIIGS debt-laden banking now exacerbated by Spain's calls for EcB monies and with the 'shorting' of Italy's 2-year government bonds; a flattening of the yield curve the same trend as seen prior to Greece's woes. Central of course is the fact that no general agreement has yet been obtained regards exactly how the E 1 trillion ESM (and old EFSF) could be made to operate, Germany's rightful viewpoint that there must be a type of securitization offered by recipient nations – ranging from gold to public assets – so as to avoid the 'moral hazard' problem that has already been witnessed by the empty promises of Greek and Spanish politicians, seeking to both gain liquidity yet also carry favour with voters by not implementing further austerity. Corporate stocks have undoubtedly suffered, with prices at record low, in turn delaying CapEx projects until greater stability appears. That has been indicated by the French, with the idea that yet another policy stimulus could primarily assist domestic producers. But that undoubtedly relies upon the release of ESM funding, so presently appears a PR tactic by President Hollande et al.

South America's desire to reduce its own cost-base and negate its exposure to 'cheap' Chinese imports has meant a quite severe policy response. This primarily via a hike in import duties, especially so upon non-Mercosaur-made vehicles, and efforts to try and re-foster a lean domestic industrial attitude, improving indigenous value-chain capabilities and prompting consumer spending on self-made goods – the previous weblog's mention of Brasil-Movimento motorcycles a good example. The national BOVESPA index hit a high of 68,394 on 13th March and hit a recent low of 52,481 as of 5th June, thus loosing 23% of its value, before rebounding to 55,651 recently.

At first glance, China's economic contraction appears even softer than expected given a growth slowdown to 6.5%, approximately half of its modern era double-digit rate. Yet the 22% YoY rise in vehicle sales in May illustrates what seems a dichotomy, when autos sales rates are supposed to typically reflect general GDP measures. The answer very probably lies with a possible over-statement of growth drop by the PRC government to stimulate 'incentivisation' by producers to maintain and grow consumption; none more so than the hyper-competitive automotive sector, reflected in the provision of a sales initiatives inland. Thus there seems a slowing of coastal generated growth off-set by new growth in 3rd and 4th tier cities and towns in more rural areas, thus a balancing of the national economy as coastal regions themselves seek to reduce cost-bases and so maintain a competitive differential in world markets in light of the deflationary forces in the Triad regions.

Here in the UK new deflationary concerns have resurfaced. The broad manufacturing sector (exempting autos) - previously a start performer throughout 2010 & 2011 - now showing signs of a marked slowdown given lacklustre domestic demand and now decreased EM export demand. That has generated political calls for sector-specific task-forces similar to that of the now politically much applauded Automotive Council, yet it must also be noted that whilst of definite value to the UK economy, the ramp-up in UK factory production of whole vehicles has been because of foreign VM (ie Nissan, Honda, Toyota) domestic capacity constraints previously caused by the Japanese tsunami. Previously the national economy had partially relied upon that important 'visible-trade' export buoyancy, both indigenously owned and foreign owned, but the weakened order book for UK companies and a possible contraction of UK vehicle exports as Japan returns to strength indicates declined value-creation. The BoE's £80bn 'funding for lending' scheme appears a moderate response given the need to both urge lending and contain a growing 3% RPI rate, yet given the caution of SME borrowing – described as the “UK's mittelstand-off by the FT – it is probable that the liquidity is instead directed at the UK stock market, across the FTSE100, 250 and possibly AIM, seeking new growth enterprises.


The World 'As Is' For Automakers -

The fragility of both consumer retail markets and the world's stock markets has for some time now created a delicate balancing act for automaker's CEO's, COO's and CFO's. With much of the Triad region's banking sector and consumers in respective 'deleveraging' mode, and wholesale finance erratic and expensive and dwindled deposit provision by car buyers, the need to protect corporate 'cash cushions' – build-up from CapEx minimisation and deferral - to provide self-financing has been the order of the day. Such internal funds used as no-cost “incentivisation levers” toward car buyers in regions where such prompting initiatives prove useful.

However, the mere existence of those cash cushions on balance sheets have not underpinned the stock-price positions of all, only those that are strategically best positioned. Others heavily exposed to retracted markets, notably Southern and 'fringe' Europe, aswell as 'core' France, have seen their stock values decline in relation to their EU exposure. This in turn, via a cross-sector dynamic, has dragged down the better positioned German companies' MarketCap valuations, though the strongest of those 3 tends to rebound soon after any bad news is absorbed, a sign of institutional investors' constant 'flight to quality', and profiteering reaction of day-traders.


Assessing the Auto-Makers -

Thus, given the erratic state of market dynamics, it would prove useful to gain greater insight into each company's “fundamentals”, so as to stave-off over-reaction to sentiment driven 'buy' or 'sell' actions in the broader marketplace.


Basic Comparison -

The following conveys the basic yet prime stock information per company:
(Prices as of market-close 15.06.2012).

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%


Here we see a wide span of current valuations, much of course dependent upon the enterprise value of the firm and the amount of shares (of different classes) made available. Even so, the affect of recent history is readable within present valuations.

'New' GM's Chapter 11 financial restructuring via seen in its price, even though down 30% from its IPO price, it still holds credible price-earnings ratio when compared to its smaller Detroit counterpart, and relatively close to the sector average.

Ford's price essentially limited by the critical inhibitors of weighty debt servicing (by far the most amongst its peers) and the extra-ordinary gains of tax exemption which has boosted profitability, but not directly from the top-line. Though its much improved dividend has been welcomed by institutionals, its 'bottom of the class' price-earnings highlight future regional and PaT concerns.

VW Group's valuation the result of its inherent global reach, B2C & B2B product portfolio reach, and the controlling families' historical desire to be very hands-on by seeking to limit the number of shares in circulation. BMW has come under much pressure recently given the concerns about the impact of global economic contraction upon 'mass-premium' vehicles, yet also reflects the trait of 'family influence' and German institutional holding so as to seek to avoid the long-lasting damage of “vulture-like” short-selling. Its low price-earnings value seemingly a result of heavily constrained liquidity within Europe, which takes a heavy toll on such a large company - as opposed to the firm's innate operational efficiency.

Daimler's price-earnings figure shows strong resilience to both the general squeezed liquidity conditions, and investor concerns about the possible severe impact of a continued global down-turn upon. This probably because Daimler's broad exposure to various private-spend, commercial-spend and public-spend vehicle segments, means that it is also equally well placed for any new European economic revival when it arrives, especially regards early phase spending on HGVs and publicly funded Bus & Coach.

FIAT SpA (FIAT-Chrysler) share price reflects the double impact of high exposure to heavily retracted EU and Brazilian sales. Critically though, ongoing concerns about Italy's core market ability to balance austerity, introduce labour reform and rebound growth; even under the new 'technocratic' administration. This critical to FIAT so as to mimic USA traction by Chrysler.

Renault similarly suffers from an anaemic homeland, but has been assisted by the very supportive earnings gained from Nissan, so better supporting its share-price and price-earnings. Moreover, since partly government owned, there is a markets expectation that Renault stands as natural primary recipient of any supportive direct or indirect government assistance.

PSA's share-price has suffered more so, as Europe's #2 auto-maker and with greater EU market exposure and apparent lack of a 'government backstop' taking a greater toll and adding uncertainty. Though GM's announced intended 7% acquisition ironically induces short-term price reduction until the purchase is actually made – GM enjoying the fact – it also argues for long term value via disposal of PSA assets to GM and possibly others; though. the “platform-share” story still does not convince.

Toyota's price highlights its dichotomy: as a cornerstone of the Japanese economy, yet endured the earnings ravages of the 'tsunami effect' which assisted continued industrial restructuring using off-shore production. Its share price seen as the 'entry cost' by Japanese pension and insurance houses for ongoing stable dividend and for governmental recognition of national patriotism. However, as its earnings increase with a US and China sales rebound, and a possibly improved dividend yield, the result may be reduction the hefty price-earnings ratio that slowly attract foreign interest.

Honda's price and price-earnings ration reflects its less domestically entrenched position, its better dividend arguably showing its greater organisational flexibility and faith in its renewed interest to North American buyers; much needed given its 1.6% car-market share slip since 2010 to current 9%.

Hyundai shows itself to still arguably be an anathema as traded on European bourses; whilst a respective pillar of the Korean economy (with the biggest production plant in the world) it is not yet listed as an ordinary or preferred standard stock, but instead as a form of GDR (Global Deposit Receipt) seeking Euro capitalisation (a EDR); thus not commonly traded, but its underlying value characteristics suggest that Hyundai Motor may seek an ordinary listing in time.

Displaying the table again, investors could seek to simplistically plot the crop of global auto-makers, purely from the prime measure of price-earnings.

Price P/E EPS Dividend

GM $21.74 6.54 3.32 none
Ford $10.35 2.23 4.71 1.93%
VW E116.80 3.25 36.50 2.47%
BMW E55.96 7.21 7.77 4.11%
Daimler E34.04 6.11 5.57 6.73%
FIAT SpA E3.66 3.23 1.13 none
Renault SA E31.10 4.05 7.68 3.73%
PSA E7.51 2.39 2.56 none
Toyota $76.50 33.67 2.27 1.65%
Honda $32.36 21.89 1.48 2.35%
Hyundai (EDR) E22.60 0.69 32.82 0.73%

To plot as such, promotes the usual modelling of depicting the archetypes of 'growth stocks' and 'value stocks'. Given the maturity of the sector, its barriers to entry etc, a true 'growth stock' is rarely ever truly seen. Perhaps only in China between 1999-2008 when certain emergent indigenous auto-companies such as BYD Auto intentionally mustered high profile international PR brand campaigns around the apparent adoption of eco-tech/high-tech, supported by renowned names such as Warren Buffet. Instead, because of the inescapable cyclical impact of macro-conditions on the auto-sector, seasoned long-term investors tend to seek-out unloved auto-stocks during a dour economic climate such as today.

To this end, whilst during normal times (in the West) many asset classes are valued at 10x annual earnings, today the demarkation level of 5x has far more resonance given the market headwinds of cautious sentiment and tight liquidity.

Using this as a very simplistic guide, we see a ranked order of theoretical attraction: Hyundai (EDR*) @ 0.69, Ford @ 2.23, PSA @ 2.39, FIAT @ 3.23, VW @ 3.25 and Renault @ 4.05.

Beyond the 5x level, are: Daimler @ 6.11, GM @6.54, BMW @ 7.21, and far beyond the 10x level are Honda @ 21.89 and Toyota @ 33.67.

However, whilst figures give a good desk-top comparison, all must be seen in context, thus it is critical to view the bigger macro picture by reading between the lines of corporate actions vis a vis regional markets and economies.

The following provides a short picture of recent issues per VM.


Corporate “Headlines” -

GM
- Presently evaluating internal successor to Akerson.
- Akerson recognises 'profitability chasm' relative to best mainstream companies
- Reducing pension burden via group annuity contract with Pru Insurance (20% 1st tranche)
- Facing increasingly tough battle in all important China
- Bochum plant 'life extension' to 2016 for frozen union costs
- Seeking to once again re-animate Cadillac vs dominant German & Japanese premium models
- Notions of any new Republican administration 'dumping' its 26% holding unlikely, expected staged sales at predetermined price-points to ensure corporate price stability.

Ford
- Mulally expected to remain
- Expected to follow the 'annuity contract' route
- Already de-risked pension liabilities by re-weighting to fixed-income
- Critically recent entrant to China so holds consumer appeal
(its May YOY sales marginally above the surprising 22% market climb)
- Seeking to once again re-animate Lincoln (like GM's strategic need)
- Studying indigenous brand for China with JV partners
- Ford Credit regains 'investment grade' status (Moodys) raising $1.5bn recently
- Announced re-alignment of EU market plan appears slow reaction

VW
- Governance issues regards Mrs Peich's Boardroom election seem to diminish
- Successor to Winterkorn expected from restructured divisional management.
- EU May sales slide less than industry average (5.7% vs 8.7%)
- China's Jan-May sales boosted by 9.3% YoY (44% for Audi)
- Continued major China expansion via plant openings (4m unit target for 2018)
- Rational acquisition of Ducati followed by exploration of Navistar Truck holding.
- Remaining stake of Porsche AG to cost E4.5bn (E0.6bn increase).

BMW
- Reithofer maintains conservative stability
- Senior R&D and Purchasing execs swap roles to strengthen internal capabilities.
- New sales records for Q1: Asian growth of 9.1% Jan-May 2012
- China sales for May up 31.5% YoY
- Concept store opens in Paris on “George Cinq”
- i8 hybrid 'supercoupe' expected at E100,000 price level
- JV agreement with Toyota on Lithium battery R&D ratified

Daimler
- Zetsche maintains strategic leadership
- Bernhard retained on board as head of Mercedes Cars until 2018
- New car sales record in May, up 4% YoY
- Truck sales up 20% in Q1
- Long awaited introduction of 'conventional' A-class range
- New Citan small van allows entry against VW & PSA-FIAT Eurovans
- Smart brand to include scooters as of 2014
- Car2go / Europcar rental scheme spans 12 cities / 4000 vehicles

FIAT SpA (Chrysler)
- Marchionne continues as corporate lynch-pin & figurehead
- Cut in CapEx by E0.5bn to E7bn given European market compression
- Introduction of Serbian Kragujevac plant adds lower cost capacity
- Italian sales incentives include new petrol discount scheme
- EU sales down 17% Jan-May 2012
- Chrysler board expanded
- US sales for Chrylser up 30% from very low base in 13.4% market rise
- European R&D slows as US R&D maintained
- Annuity contract pension changes seen as uneccessary

Renault
- Carlos Ghosn cites “3-4 years stagnation” in Europe
- This negativity viewed as pressuring ministers to evoke state aid.
- Able to service Nissan with components during tsunami aftermath
- Star performer division Dacia cuts production to re-balance slower sales
- Renault badged (Dacia) Duster performs well in slowed Brazil
- EU sales down 19% Jan-May 2012

PSA
- Varin continues strategic efforts for major cost reduction and asset divestment
- Downsizing of 6000 posts by YE2012, Sevelnord plant & elsewhere
- Expected to dispose of 50% of GEFCO logistics subsiduary to PE consortium
(8 candidates emerged, 2-3 probably sharing the deal to preserve cash)
- China sales up approx 20% Ytd in May
- EU sales down 15% Jan-May 2012

Toyota
- $2.5bn bond issue announced to run between 2012-14
- Massive 87% YoY rise in US sales in May 2012
- NAFTA plants increase production by 64% Jan-May 2012
- Japan sales boosted by 125% (exc kei cars)

Honda
- President & CEO Takanobu Ito highlights share-holder value: to be seen
- NAFTA plants increase production by 67% Jan-May 2012
- Japan sales boosted by 48% (exc kei cars)
- Recall of Civic and other regulatory safety investigation in US

Hyundai
- Chairman Mong Koo Chung (holding 25% share-base) maintains solid control
- Worldwide sales up 8.1% in May YoY
- All new Sante Fe and Sonata models released helping model mix
- Doubling of production with Kibar Holding in Turkey
- Small car product recall in China, possibly used to cross-sell products / services
- S.Korean union calls to reduce flexible labour content (and so 'competence advantage').

[NB. European auto-execs meet this week under European Union supervision to discuss the possibility of a “factory-closure blueprint”; so as to discourage member states from offering incentives to protect local jobs at the cost of the broader efficiency of the Eurozone.

However, even as Marchionne (the idea's originator) cites, such an agreed outcome given the present conditions, looks unlikely.

Although it will be an opportunity for 'suffering' VMs (FIAT, PSA, Renault) to discuss JV projects. Additionally Brussels is also examining whether to introduce yet higher standards of CO2 emissions targets for new cars, a topic no doubt welcomed by FIAT & PSA]


Plotting VM Positions -

The accompanying chart provides a simplistic perspective of the respective positions of the global VMs vis a vis each other. The respective axis used are: the 'micro' of a company's price-earnings (P/E), and 'macro' which assimilates the general picture of that company's prime challenges / opportunities ('headwinds' vs 'tailwinds' with mid “transition zone” seperating the two). Though the P/E is a well recognised as an objective pseudo-scientific metric (and the 5x vs 10x demarkation has been mentioned), conversely, the assessment of exactly where a company sits in the macro picture depends upon a generalistic subjective summary, weighted by exposure to contracting, stable or expanding regional economies; and its competitive advantage / disadvantage therein.


Results -

Expectantly, the lower down the vertical P/E axis a firm sits the more enticing the value proposition appears for the investor, but this must be viewed against the 'real world' context.

Today that low price-earnings figures could be said to be either the outcome of innate pessimism regards a corporate turnaround, or the sign of cautious slow moving “viscous” market liquidity, or indeed a combine of both. Thus anything under 5x deserves close evaluation of operational health and prospects.

Those firms with higher P/E numbers between 5x & 10x presently tend to:

1. Have an intrinsic governmental 'safety-net' (ie too big to fail)
2. Comprise of anti-cyclical divisional-based business model
3. Historically demonstrated consistent value-creation

Contrastingly, the Japanese firms with (to western eyes) extreme P/E ratios above 20x or so are located in an ostensibly deflationary 'low-growth' homeland, which has experienced decades long 'pumped liquidity' programmes.

[NB This in turn has appeared to 'normalise' a Japanese firms valuation relative to the seemingly 'frothy' valuations of far newer high growth companies in China and across SE Asia. These notionally comparable valuations in turn assisting the book-building process behind ever ongoing M&A, cross-holding and JV process which has built modern industrial Asia].

Ironically, it may well be the massive differential between the 'poor' West and 'valuable' East that kick-starts the European revival in the mid-term future.

The chart and each respective corporate position speaks for itself.

Companies Focus – The Western 8 – Daimler AG: From Zero to Expectant Low Key Hero

The decision not to pay a FY2009 dividend by the Daimler board came as a shock to those more remote investors who for 14 years have simply become as used to seeing a dividend cheque roll-in as awaiting the morning sun rise.

But rightly, the Daimler board recognised that at a time of consumer markets' and capital markets' disruption, short term investor gains must be over-ruled by mid and long term performance concerns; the corporate ability to re-strengthen itself and create liquidity defences against unsettling times the prime issue. Close coupled, operationally attuned investors understood, forgave and in Q1 2010 saw a return of a conservative payment which still pays heed to the need for reserve holdings.

Whilst ideally a forthcoming dividend would have been welcomed, investment-auto-motives understands and ratifies Daimler's decision; for the offering of a small nominal sum would have been both disheartening to investors and lost operational leverage to the company.

As seen by the graphic, though ranked 3rd out of the Western 8, with the innate paradox of comparatively low immediate returns – this substantiated by VW and BMW standards – the investment-auto-motives' expectation (as now being seemingly delivered) was that Daimler's re-building of its defensive walls would create improved share-price valuations as opposed to simply early-phase liquidity returns. Given this early stage of the west's economic cycle upturn, the markets should and will be rewarding actions that substantiate corporate fundamentals, and not simply those that court investors via unsustainable cash payments.

At the other end of the business spectrum amongst the glitz, glamour and cost of Formula 1 racing, McLaren-Mercedes took 1st & 2nd in the recent Turkish Grand Prix, thanks largely to a massive error by their prime competition. As with the core business, Zetsche knows that continue success on the track aswell as in the board room and in capital markets will be dependent upon self determination rather than the misfortunes of others.

However, the Daimler board seem acutely aware of the level of investor goodwill pliabilityoit, recognising that for example its largest single shareholder, Abu Dhabi's Aabar Fund, is under pressure to restructure its financing and must show liquid income from its portfolio interests to gain less onerous loan rates.

Thus the Daimler balancing act continues across 2010, evidence of which was seen by its remarkable stated doubling of FY2010 earnings guidance in mid April, and for which it was rightly criticised, the news adding 7% on its MktCap on the day. Ultimately the only evidence of chicanery investors which to see regards Daimler is that which is appears on the F1 track. Daimler rebuked, it must be said that such still fragile times in rebuilding investor trust and so industrial might demands as much transparency as possible – a theme investment-auto-motives has constantly stated. Yet Daimler know that such out-performance in Q1 out-shines above momentary criticism.


Q1 2010 Performance -

As with its peers, top-line Revenue improved 13% to E21,187m (vs E18,679m in Q109), of which Western Europe accounted for E8.7bn (Germany's contribution E4.2bn), NAFTA E5,363m (of which US E4.7bn), Asia E3,707m (of which China E1,5bn, up 91% YoY). RoW was E3,414m (up 47% YoY)

This then shows the relative reliance on Germany (19.8% of sales), good news as only one of the few still healthy EU nations even if it took a comparably greater national TIV hit than its EU neighbours over the year. (Plus, reports of German unemployment data falling fast meets investment-auto-motives' expectations of national health). It also highlights the comparatively small contribution from China (7% of sales), highlighting the growth potential of luxury, executive and premium compact and premium small cars in medium term, aswell as in the longer term potential for the van, truck and bus businesses, with relative advantage to the Financial Services business as the PRC continues to de-regulate its capital market restrictions on foreign corporations.

The 13.4% revenue improved revenue was obviously achieved due to re-buoyed consumer markets but the bottom-line assisted via workforce reduction of 9,040 , approximately 3.4% of Q109's total.
Unlike some, Capital Investment grew to E783m (from E688m) – still historically moderate but positive – whilst R&D saw moderate growth to E1,134m (from E1,116m), the capitalized development cost essentially static at E336m (from E331m).

Cash inflow from operating activities declined to E1,957m (from E2,526m) which was a hefty 23% - and shows the rational for the previous dividend cut. Yet EBIT improved at E1,190m (from E-1,426m), whilst Net Profit returned back into to the black at E612m (from E-1,286m), now able to provide a per share dividend of E0.65 (vs E-1.40 loss in Q109).

FCF was up to E0.3bn (vs E-1.1bn a year ago) which was a welcome measure, whilst Net Liquidity in the Industrial business was E7.4bn (vs 7.3bn as of 2009YE).

This is good news, yet the optimistic future guidance – double its previous at over E4bn - is still only guidance and cannot be taken as a guarantee of ultimate YE performance. However that reactionary 7% rise in stock has been sustained with a near rebound to recent highs; assisted by Zetsche's prominent E4bn comment on the website, so the stock closing at just under E41.00 by 01.06.2010 close of trading, having hit a recent E41.45 peak.


Strategy -

In the last BMW post, investment-auto-motives highlighted the essential strategic difference between Daimler and BMW. Beyond its obviously more diversified vehicle portfolio with vans, trucks and buses, Daimler continues to operate as both self-serving in proprietary R&D aswell as 3rd-party industrial 'Integrator'. Whereas BMW as self-serving premium sector 'Dominator'

[NB versus VW as 'Propogator' of multi-platform, multi-segment technical solutions – the philosophy investment-auto-motives names “scale-x-tricks”©2010 (ie segment trickle-down and cross-over efficacy].

Daimler's regard for underpinning the business fundamentals relative to its own needs and that of the global auto-industry has thus generated a more expansive 'integration' strategy.

Hence in the Cars division building upon previous engine contract manufacturer for other VMs with the recently announced new alliance with Renault-Nissan – offering a symbolic 3% cross-holding. Zetsche and Ghosn rightly keen to gain technology transfer and so operational synergies in cars, vans and engines with obvious concomitant cost-savings, whilst presumably stringently defending each's separate product and brand identities from collusive dilution.

It was an open secret that Ghosn was open to such discussions given that 10 years on Renault-Nissan's cost-saving capabilities were running thin – even if denied come IR meetings or the AGN. Equally the needs for Daimler to:
1.Plug its glaring competitive gap via securing cost-efficient small/compact car development for its next generation A & B-class vehicles.
2.Seeking new clients for 3rd party sales of its large engines.
3.Recognising the opportunity for multi-brand (badge-engineered) cross-selling of its large vans (now that the Chrysler-Dodge contract is abating) to R-N, and in turn plugging the gap in its medium van portfolio with Renault derived vehicles.

Having had its fingers previously burned with Chrylser, wanting avoiding the political complexities of GMNA and recognising the limitations of Ford relationship, Daimler recognised that the reality of seeking a US alliance partner was impractical. Given its (and everyone's) typically slow progress and political, cultural and legal concerns in China, whilst it still affords massive future opportunity , the reality of generating another Sino alliance whilst with the potential to create major value looked unlikely given the PRC's wishes to reduce the number of China's manufacturers and its lack of technical advantage. India already has its small car ideology well under way, yet India's own manufacturers have already set up shop with Western others – Renault previously included with Mahindra, that JV now ended – but little immediate benefit was to be gained. Thus an EU partner and after much industry conjecture, the pragmatically right deal with Renault-Nissan; enabling ideally access to economies of scale and new contract markets for Daimler and improved quality for Renault-Nissan.

In an interesting move that demonstrates Germany's political and economic ambitions regards its leadership in intra & extra-EU industrial affairs, the recently increasingly fragile German-Russian relationship has been partially bolstered. The energy cost and supply issues surrounding Russian exported gas has been partially diffused by Daimler raised stake in Russia's KAMAZ truck business from 10 to 15%, commissioning Troika Dialog (via MoU) as the intermediate investment bank as the deal-maker & the EBRD as lender, 4% stock retainer, and contextual 'fixer' for the deal. Given Russia's collapsed truck and car markets, its desire to re-align its auto-industry to world-class capabilities and Moscow's recently (rightly) denied request for additional FDI from Renault to re-balance MktCap losses, this Daimler led deal – with now Renault linking - assists in helping to heal previous wounds between Moscow and Berlin and Moscow and Paris.

On the Indian sub-continent, Daimler sold its remaining and full 5.3% holding in TATA Motors. Management reports that it was done to benefit from TATA's 2009 rapid rise in stock-price, bringing in E303m, but it also highlights the concerns of confidentiality leakage and reduced project potential given the increasing TATA – FIAT relationship, as FIAT re-structures itself as separate cars and Industrial divisions, and undoubtedly seeks to leverage greater cross-connect with TATA's future product plans.

[NB Given Renault's retraction from Mahindra and Daimler's retraction from TATA, investment-auto-motives' conjects that Daimler-Renault-Nissan may well seek to acquire the struggling automotive operations of Hindustan Motors – now under Administrator's control. Taking the opportunity to leverage the thriving but typically technically aged Taxi market (ie Ambassador model) with a Hindustan (Dacia) Logan plant which can rely on a steady-state order book from the taxi trade, in which it has already made inroads. Critically, capacity also to be expanded to assemble beyond Dacia Logan, with Logan MCV, Dacia pick-up & van, Dacia Duster and latterly supplemented by Renault's LCVs and Daimler's MCVs. Such a move would give Daimler-Renault-Nissan a far greater latitude and largely independent control in accessing India's burgeoning car market; the growth of Dacia Taxis being the 'proof of the pudding' regards vehicle quality, much as Ambassadors were in their early years, as were Mercedes E-class taxis in Germany in the 1960s +].



Operations -

Cars:
Mercedes-Benz:
M-B's 'big-guns' have been fired what with the introduction of S & E-class over preceding quarters, now climbing in their market penetration and so offering sizable financial contribution. As seen below their well managed cyclical timing has been perfectly attuned to the western economic rebound in corporations, SME's and private 'self-rewarders'. Thus if the global economy remains stable, they will continue to climb their life-cycle/capacity curves and continue to add increasing income over the next 2-3 years to the Daimler Group. Additionally high margin variants such as E-class cabrio will be introduced as will lower volume but high-margin earners such as new (effectively face-lifted) R-class (presumably dependent upon CapEx amortisation rates of the under-performing Generation1 car), the new SLS AMG and what will be the new CLS 4-dr coupe (notionally the F-800 Style concept). The previous design re-orientation of C-class to prevail a more sporty attributes has buoyed its popularity and lengthened its effective lifecycle, the 2010 facelift a low-cost low-key effort which should be of limited drag on cash-burn.

A and B class remain the weak horses of the stable, that market weakness well recognised with far greater common parts sharing than previously to help balance the platform's books. Furthermore M-B has belated recognised that the innate character of the cars had to better align with BMW 1 series and Audi A1, the previous monobox designs whilst initiallyrward thinking in the early 1990s had become class staples by mass manufacturers in the segment and so premium producers recognised the need to offer something more brand attuned in a 2 box, lower roofline, package. That also opens the doors for B class's entry into the US which will in due course be of great advantage.

However, the truth remains that Merc's efforts within the small/compact car space have remained less than spectacular since the end of the 1st generation A-class, and so from a financial momentum perspective seems to have been value static if not value-destructive. The apparent rational behind NPD theory that retiring C & E class customers would be naturally drawn to downsized, easy access/egress cars seemed sound, yet sales figures have remained below par and the vehicles failed to draw new conquest young customer's to the brand given their innate conservatism. Change is coming but later than ideal, the effect of which in income terms will be 12 months + away.

A new threat has appeared in the guise of Audi's new A2. Although press confusion reigns as to its specification – A1 based or not -, investment-auto-motives suspects it will be replayed as a 'technical pathfinder' in both e-powertrain and alloy construction to make the functionality (if not business model) work, and very much as the 1st generation car was. This project effectively financially counter-balanced by the stylised yet conventional A1 with far greater sales base. Thus M-B must create a new identifiable and income generating space for its A & B class amongst what has become an increasingly crowded and competitive premium segment.

Maybach:
The 57 & 62 limousines are undoubtedly aging given their 13 year tenure, noticeable even with minor alterations and new series, yet the company understandably still selectively promotes to maintain profile. Product placement in film and TV with perhaps the greatest exposure. Just as the first 'Sex & the City' featured the then new GLK and S-class, so the second film newly released pointedly illustrates 4 Maybachs, an E-class momentarily shown (to highlight Maybach similarities) and the ever life-extended G-wagen. purposefully set upon the sandbanks of The Hampton' cognitively sequentially after the appearance of a SWB Land-Rover in the Persian desert – an effort to steal sales from L-R both in the Middle East and N.A. But prominence goes to the Maybachs as the choice of Abu Dhabi wealthy, and Daimler's notional nod to its largest shareholder, others who follow in the Daimler stock choice and of course its loyal Arabic client-base

Smart:
Being the trailblazer of the archetype city-car undoubtedly came at a cost for Daimler, the project breaking even almost a decade later. Whilst it created an iconic new brand and re-asserted Daimler's engineering prowess, it took a financial toll, the underperforming 4-door vehicle via the Mitsubishi JV adding to brand diversification expectations, but ultimately adding to fiscal woes.

As GM experienced with managing the second phase of its innovative Saturn brand and Toyota with Scion, the balance of criteria required to expand what is supposedly a different type of division means that conficts of interest appear between intra/inter-company synergies and the desire to retain identity. The 4-door Smart demonstrated the case well. However, given Daimler's need for small car project and production cost reduction and its desire to continue brand innovation it has decided to leverage the Renault alliance with shared architectures for new ForTwo & Twizzy, and new ForFour and Twingo. This then allows Daimler to maintain its industry 'Integration' ethos.

[NB investment-auto-motives role in pushing Daimler to 'sweat its Hambach assets'. This initiative then allows Daimler to play a central role in the continued market development of the archetype 'micro-city-car']

Equally A & B classes' comparatively low sales numbers means the need to create a low cost yet capable platform is all important to the financial success of Daimler compact cars, with the joint development of 3 & 4 cylinder engines theoretically combining a creative tension to reach married cost-reduction and improved quality levels. Daimler recognises that it should play a role in technical and supplier leadership in this dynamic arena, a field in which the likes of Toyota/Daihatsu and Honda have long reigned in Japan, with Daimler leveraging the lower Euro versus Higher Yen to gain broader Euro, US and RoW OEM sales access.

This was exactly the scenario that investment-auto-motives wanted to see develop for Daimler some time ago.


Van Division:
The alliance also of course highlights the potential for collaboration regards large, medium and small vans, each party able to plug the deficiencies of its counterpart. Whilst Daimler's presentation states 2 arenas of compatibility in a) developing a shared architecture for city-vans, and b) engine parts supply for medium vans – the level of synergies potential here, and its ultimate effect on the Cash Book and P&L seem to be being intentionally underplayed.

The competitiveness of the van sector has always been rife and early recognition that collaboration was the best form of unit margin protection; hence the early formation of Ford-Iveco, latter formation of FIAT-PSA's Sevel JV, Renault's role in supplying internally and externally to partner Nissan & Vauxhall/Opel. As the smaller medium sized market became crowded by these JVs, the Japanese and other incumbent EU majors like VW and Ford, Daimler moved its Mercedes Vans into the newly emerging large territory.

However the Renault relationship means that Mercedes Van can possibly access through 'badge-engineering' the MWB and SWB Trafic and Kangoo models for sale in RoW regions where Renault does not operate, or where Merc is well recognised but the present cost-level of Vito prohibits entry. These may include North America if jointly agreeable and the project costings (requiring requisite engineering & regulatory vehicle modification) prove the theory, where it could feasibly join the Mercedes Sprinter if/when the CKD agreement with Freightliner ends, as does contractual supply to Dodge.

The 'elephant in the room' regards the JV is the quality chasm between Renault and Mercedes, especially seemingly so on LCVs and MCVs. The real-world reliability and durability of Renault vehicles is under par compared to German and Japanese manufacturers, and has been known to be so for many years. Thus Daimler will need to integrate a comprehensive quality check system throughout product development phases, into production and track the JV vehicles for faults when in use. This will obviously be a project or divisional on-cost but must be calculated into the nominal cost-savings.

The good new for Daimler has been the upturn in van sales over the last 3 months or so, with corporations loosening budget control for the acquisition of required lower cost capital goods.
However, the renewed credit availability concerns mean that old and new customers will be trying to negotiate pricing and terms flexibility, thus Daimler must combat such revenue degradation with sensitive yet firm customer service stance, stating and re-stating the Daimler quality difference with as much technically available information from in-house and independent sources to convincingly illustrate their case. This so especially given the reality that the division's EBIT and RoS fell in Q1 2010 to E64m and 3.8% from Q409's E126m and 6.8%. As the market for mid-ground business capital expenditure improves (vs halted large and small scale capital goods) so Daimler should grasp the nettle to support its van business.


Truck Division:
Much the same story for the Truck division, with good re-growth over 2009 from 40k units to 77k units, but stalling slightly in Q1 2010, dropping to 72k. The major function of this was the major contraction of the NA market, whilst Asia picked up much of that slaes slack and sales in Europe and Latin America grew slightly. It appears that the truck division may not have re-structured as quickly and as drastically as it could have, no doubt expecting the usual up-tick in HGV sales as part and parcel of the early phase economic cycle up-turn. This is typical for truck building sector, what with more entrenched value in capital intensive, slower-build products and the slow addition to factory and dealer inventory levels (as with Agricultural, Construction and other Industrial goods).

Thus it was not until Q1 2010 that EBIT and RoS returned to a positive, but lowly E130m and 2.7%.

However, given the complexity of the business versus its simpler peers - including spread of model types across various classes, the inclusion of Freightliner business, and the ongoing cost of integrating the Mitsubishi Fuso truck business - Mercedes Truck has performed well to rebound as quickly once the level of required re-structuring was recognised and acted upon. However, even under duress conditions Mercedes Truck should be plotting steadily higher EBIT and RoS. Though of course as bigger ticket items truck replacement sales are still not as plentiful as large van replacement, the ability to shed inventory, ride the N.A recovery and L.A. Rising tide, better orchestrate build orders and importantly gain client deposits to assist cash-flow will be essential elements of the division's rebuilding exercise.


Bus Division:
The M-B Bus division appears to have been well served over Q109 to Q1 2010 by initially the global stimulus spending of international governments on infrastructure projects, and latterly the steady increase in capital expenditure by listed and privately held public transport companies, balancing the availability of credit with the EU commuter's shift away from car use and toward public transport. Such demand pull meant that normal dynamics did not apply, and so although the M-B model mix was less favourable demand allowed inventory to be shrunk and the order book to be boosted.

This then witnessed a Q109 EBIT and RoS of E65m and 7.2% fall to E23m and 2.2% by Q309 before rebounding to E41m and 4.1% by Q1 2010.

Whilst M-B Bus points to new coach models and variants, tour bus companies and indeed national coach companies will not be replacing their fleet in large numbers any time soon, even if numbers here do pick-up Instead it will be the municipal bus operators whether state-owned or private that will be seeking replacement and additional vehicles, the Hybrid Citero and Hybrid Orion seen as halo models that will be bought as the PR aspect of broader conventional fleet packages for EU/Asian and N.A. Operators respectively. Thus here with such Hybrid models available, even if not sold in large volumes, will act as the lever to retain and attain client interest. Add the onward growth of national, municipal and private bus operators through L.A. and thus the Bus Division should contribute a slow but strong and steady income stream to the Group.

Focus is seen relative to the Indian market, Following on the heels of Volvo, Daimler has started to introduce a line of modern coaches in the country for long-distance inter-city express-coach travel, an area seen by many as ripe for foreign company entry as an alternative for the burgeoning middle class over antiquated bus services and slow rail services.


Financial Services:
The typical and righteous strict Germanic attitude toward de-risking of credit-based assets has been a strong aspect of the Financial division's efforts over the majority of the last year. All large German carmakers - Daimler, VW & BMW – have deeply re-assessed their risk exposure.

Recognising the importance of the FS division in what are still uncertain, somewhat nebulous credit-enabled car-demand times, Daimler has cast a critical eye over its leasing and credit operations to both eliminate loan default risk and improve cross-selling of complimentary financial products to off-set income loss. Hence the joint initiative with Allianz SE to sell insurance.

Behind the customer-facing 'financial products pack', back-room operations have merged what were separate BeNeLux sections into a singular Netherlands based function. On a global regional basis, the (often intentionally) lost and newly gained contracts appear to reflect the typical expansion and contraction dynamics of the global car sector.


Financials -

The prime Q1 figures have been stated, but the key element of Net Liquidity in the Industrial business has come back into sharp focus with sovereign debt market problems and the possible return of pressure across the capital markets as creditors seek safe havens and/or a higher cost of loaned capital. Even with what appear calculation mistakes in its Q1 update charts, the interim report shows improvement of E100m to E7.4bn over the last financial quarter, the E300m from the TATA interest disposal and E600m from other operations degraded by the Working Capital drain of a stated E600m.

Within the Cars division, the improving model mix the Q409 & Q1 with new S and E-class providing an increase in average unit margins, aswell as adding to overall sales numbers, so boosting the income stream on a dual-fold basis, Q1 showing 276k units versus the previous Q109 quarter's 230k units. The QoQ improvement in EBIT for M-B Cars has been evident since Q109 with the new luxury and executive car influx over the last year, the RoS showing a remarkable turnaround from Q109's -12.4%, Q209's -3.2%, Q309's 3.5%, Q409's 5.3% and Q1 2010's 7.0%. The EBIT in that time rebounding from E-1,123m to E806m.

Within the Vans division, Q1 2010 Revenue rose to E1,697m from E1,291m, thus seeing a 31% increase, giving an EBIT of E64m from E-91m a year previously, this based on a 62% increase in unit sales at 46,655 units from a previous 28,834 units. As with Cars the EBIT balanced by a rebounding market demand and fixed-cost savings including a 9% workforce decline.

The real uptick coming from the EU, up 59%, Germany itself up 33%, whilst L.A, also saw a 49% increase. Worldwide M-B Vans was up 62%, Q1 2010 the tail period the then building B2B business confidence of Western Europe, prior to recent jitters.

Within the Truck division, the basic figures were: Unit sales of 70,557 (from 65,405) so up 8%, Revenue E4,873m (from E4,918) so -1% down, EBIT E130m (from E-142m), with a workforce reduction of -6% over the Q1 to Q1 period.

On a region by region basis, W.EU dropped 23% YoY, with Germany showing a fall of 31%, the US pulling with 10% increase to 15,089 nits from 13,748 units, and L.A (excluding Mexico) showing a 79% increase to 13,014 units from 7,282 units, Brazil itself showing a 81% increase thanks to a combination of strong economy sustained by tax breaks. RoW improved 9%. yet Daimler appears to believe it has missed out on portions of the BRIC+ success story and so has, as mentioned, created closer ties to Russia's Kamaz Truck.

Within the Bus division, full bodies and chassis deliveries increased to 8,396 units from 6,820 YoY, up 23%, so boosting Revenue to E1,011m from E904m. Yet even with a -4% reduction in workforce overhead costs, the EBIT dropped to E41m from E65m, down -37%. Whilst the delivery numbers on the surface look good, reading between the lines, it appears that the mix between full-body bus & coach and chassis-only deliveries is shifting toward the lesser value chassis sales. This is an unsurprising trend given the comparatively high-cost base of German skilled and semi-skilled workers relative to other regions. Over the last decade of so EM countries have become more proficient in acquiring and developing such body-building skills and (metal structure and plastic cosmetic) parts manufacturing capabilities, as part of their own national economic development models. This trend appears to have visibly surfaced over 2009, thus M-B Bus will need to continue to look closely at its place amongst the future dynamic of the industry, the Indian JV with Sutlej Motors for its inter-city coach indicating that it seeks an EM leadership position.

Within the Financial Services division, a rapid turnaround from Q109 EBIT losses of E167m saw QoQ improvement with the exception of Q3 at E-4m. Q1 2010 shows a positive E119m, (from a negative E-167m last year).

The basic detail released shows a total contract volume worth E59,863m, (down from E61,981) generating E3,061m in Revenue (from E3.150m) which after deductions gives the E119m. Of note is the 2% reduction in the division's workforce relative to a 6% increase in new business, showing the re-orientation of the business towards income streams with greater potential and less risk – such as additional – typically deal correlated - insurance products , these up 13% YoY thanks to a newly agreed distribution deal with Allianz SE


Conclusion -

For good historical reason, having sailed the stormy waters of the pas and been caught in a few storms, Dieter Zetsche today is recognised as the pair of stable hands on the tiller and mainsall of Daimler.

Although today's macro-economic and micro-economic circumstances are unlike anything from the past that can be used as a parallel guide, Daimler Group should theoretically benefit from the painfully slow yet staggered cyclical upturns in the US, UK and Western Europe – the order book for Cars, Vans, Trucks and Buses growing in that respective order given the vehicle replacement needs for the multi-various commercially-linked private and business consumption M-B ultimately services.

Yet that painful slowness also provides the required timeframe to re-orientate a large, broad and complex industrial organisation, even if not going as far as say FIAT in its split of Cars and Industrials. The upcoming remainder of the year should see both a steady state income primarily driven by E and S class reprieve regards investment pressures, whilst van demand stays on a steady upward trend, truck demand outside the EU remains strong, and bus demand probably grows though at a lesser pace than recently.

As ever, for the West, credit availability will be key, and vehicle purchase will continue to be based on pure rationale as for both small business and fleet buyers alike, the sweating of in-place vehicle assets will mean that the replacement cycle will be longer than seen over the last 15 years or so. The biggest ticket items such as the largest class semi-trailer trucks will stay depressed in historical terms with the ongoing effects of in the west, inter-fleet consolidation through business M&A, meaning that for many fleet attrition will have been the norm as older vehicles are sold and not replaced so that fleet size and so transport supply reflects the expected flat-lining of demand after the last year of B2B re-stocking. And in the east, a preferance for rigid smaller trucks of lesser GVW suited to roads and practicable purposes.

However, even with scattered market pot-holes such as this, the road ahead for Daimler looks more promising than for the typical mass manufacturer of mainstream cars given Daimler's positioning in premium passenger cars, its utility offering regards freight and passenger transport, its clear-headed handling of its Financial Services business. With as an over-arching aim, its vision to remain as leader in the realm of proprietary technology; through in-house R&D development into evolutionary tech systems & reach into the more esoteric, aswell as additional on the ground JV alliances with EM based domestic companies. Which when all combined continue to weave the corporation into the very fabric of the global auto-sector.