The Q2 earnings season saw a raft of mixed results spanning the good, bad and ugly; thus creating a sense of disturbance. Even historically defensive sectors such as banking and oil/gas providing lesser safe-harbours than the case in the past, given high P/Es, low yields and their own PESTEL headwinds. All adding to the 'risk-on, risk-off volatility in the search for value.
Contradictory Signs -
So an an unsure and erratic milieu providing a reduced rational structure for general interpretation. Created by the contrasting “pro and con” results of now globally inter-connected continental macro-level surveys, together with at the micro-level the affect of highly managed earnings guidance from companies (to reflect or boost release sentiment), and critically, the market reliant announcements of influential administrators and politicians. All combine to generate what was predicted and became a sideways moving market with 'snap' sentiment swings of the market – propelled by high-frequency algorithmic auto-trading – and best benefiting short-hold weekly and monthly traders who seek-out the opportunities of 'trough-point' and 'peak-point' stock dynamics, or those long-term participants slowly and cautiously building up holdings when prices (even in low P/E companies) appear attractive.
Being cyclical in nature, auto manufacturers have been forced to ride the heavy weather sentiment of the markets, perhaps more so than most given the demands of heavy capex and working capital requirements.
This now most evidently seen in North America, as the previous short-term financial markets' optimism provided by QE1, QE2 and Operation Twist and the successful lean running of large-caps and SME companies runs into the headwind of revived but still relatively anaemic consumer spending, forcing companies to remain cautious, even in the low-interest (often corporate bond secured) lending environment.
So, whilst America solved its 'capacity obesity' problem with Chapter 11, whilst there may be very real regional structural concerns in Europe, history demonstrates that it is often the case that national economies and auto companies seem to prefer to maintain what could be regarded as 'fallow' capacity (even after the 2 plant closures in Italy and Belgium): for either future job creation or factory disposal (trade-sale or otherwise), whilst awaiting the eventual future economic upswing
Mid and long-term offer a distinct value creation promise in an ever expanding worldwide market, where the BRICS & CIVETS offer so much proven potential. But given Europe's familiarity, still relatively wealthy demographic, cultural links and easily influenced governments – especially now given the economic corporate advantage - an auto-executive's mind still no doubt thinks the company that conquers a now much enlarged Europe (and critically vie against strong Japanese and S.Korean competitors) then has the political and technical lead to conquer the world.
[NB Though FIAT's Marchionne calls for cross-continent European capacity reduction, most other CEOs well recognise the liquidity firing power that GM and FIAT-Chrysler have (intrinsically backed by US foreign policy and a fiscally enabled eased “US$”) to industrially 're-acquire' Europe].
Comparative Q2 2012 Results -
The accompanying graphic (data table) provides an overview of the Q2 results for the prime 'global 11' automakers, GM, Ford, VW, BMW, Daimler, FIAT-Chrysler, Renault-Nissan, Peugeot, Toyota, Honda and Hyundai.
[NB data sourced directly from Q2 / H1 company reports. It appears that for VW, Renault-Nissan, Peugeot and Hyundai, the exact details of a weaker April, May & June sales period have been intentionally absorbed into a general H1 depiction. For the purposes of basic calculation / assumption, the Q2 figures presented are half the H1 numbers presented].
To best provide direct comparison each of the primary accounting lines is examined on a company versus company basis. This across: Revenue / Net Profit / EPS / Liquidity vs Q2 2011 standing.
Revenue -
GM : $37.6bn vs $39.4 (-4.6%)
Ford : $33.3bn vs $35.5bn (-6%)
VW : €47.7bn vs €38.85 (+22%)
BMW : €19.2bn vs €17.9bn (+7%)
Daimler : €28.9bn vs €26.3bn (+10%)
FIAT-Chrysler : €21.5bn vs €13.2bn (+63%)
Renault-Nissan : €10.467bn vs €10.55bn (-0.8%)
Peugeot : €14.77bn vs €15.56bn) (-5%)
Toyota : Y5,501bn vs Y3,438bn (+60%)
Honda : Y2,435.9bn vs Y1,714.5bn (+42%)
Hyundai : KRW21,052bn vs 19,162bn (+9.9%)
Of these, it is apparent that the notional 'winners' regards Revenue improvement are FIAT-Chrysler, Toyota, Honda, and VW & Hyundai. But it must be noted that the Italian-American and Japanese producers come from respectively low bases, so 'easing' their improvement. Whilst the German and Korean producers maintains traction from their record high sales base.
Net Profit -
GM : $1.5bn vs $2.5bn (-40%)
Ford : $1.04bn vs $2.4bn (-56%)
VW : €4.4bn vs €3.25bn (+35%)
BMW : €1.28bn vs €1.77bn (-27.7%)
Daimler : €1.51bn vs €1.7bn (-11.17%)
FIAT-Chrysler : €358m vs €1.2bn (-70%)
Renault–Nissan : €393m vs €626.5m (-37%)
Peugeot : €-409.5m vs €403m (-200%)
Toyota : Y290.3bn vs Y1.1bn (+26,300%)
Honda : Y131.7bn vs Y31.7bn (+415%)
Hyundai : KRW2,550bn vs 2,310bn (+10.4%)
The 'winners' here are Toyota (by a massive degree), Honda, VW and Hyundai. The above remarks pertaining to the Japanese industrial / commercial 'bounce-back' are reflected here at the bottom line. This much contrasted the American duo's foundering as profitability is surpressed to build-up cash reserves and fund capex projects.
EPS -
GM : $0.90 vs $1.54 (-41%)
Ford : $0.26 vs $0.59 (-56%)
VW : €12.05 vs €10.04 (+20%)
BMW : €1.94 vs €2.07 (-6.3%)
Daimler : €1.34 vs €1.51(-11%)
FIAT-Chrysler :not stated
Renault-Nissan : €1.37 vs €2.24 (-39%)
Peugeot : €-1.365 vs €1.77 (-177%)
Toyota : Y91.67 vs Y0.37 (+24,770%)
Honda :Y73.09 vs Y17.64 (+414%)
Hyundai : not stated
Correlated to the outcome of the previous section, the 'winners' here are Toyota (by that massive leap), Honda, VW (and expectantly Hyundai, though not indicated by the company). Once again the reduced profitability of the Detroit 2 is viewed through still positive but much reduced EPS.
Operating Cash Flow -
GM : $3.8bn vs $5.0bn (-24%)
Ford : $0.8bn vs $2.3bn (-65.2%)
VW : €3.35bn vs €4.2bn (-20%)
BMW : €1.84bn vs €3.0bn (-39%)
Daimler : not stated
FIAT-Chrysler :€1.08bn vs €0.52bn (+300%)
Renault-Nissan : €541m vs €767m (-29.5%)
Peugeot : not stated
Toyota : Y702bn vs Y316bn (+222%)
Honda : Y737.43bn vs Y1,070bn (-31%)
Hyundai : not stated
Here FIAT-Chrysler and Toyota win by very wide margins, with Ford seen to suffer most.
Free Cash Flow -
GM : $1.7bn vs $3.8bn (-56%)
Ford : $1.77bn vs $0.46bn (+384%) estimated
VW : €0.995bn vs E1.46bn (-31.5%)
BMW : €853m
Daimler : €1.0bn vs €1.13bn (-11.51%)
FIAT-Chrysler : €0.39bn vs €0.11bn (+354%) estimated
Renault-Nissan : €-100m vs €60.5m (-265%)
Peugeot : €224.5m
Toyota : Y49bn vs 51bn (-3.9%)
Honda : Y64.36bn vs Y339.44bn (-81%)
Hyundai : not stated
The apparent 'winners' here seen to be Ford (in stark contrast to its OCF) and FIAT-Chrysler with more than a tripling of FCF YoY. These figures are only simplistic guestimates, but may have been officially unreleased to build-up greater 'rolled-up' FCF figures for a later Q3/Q4 release, given the power of the indicator to tempt investors. Suffering most is Renault (and presumably Peugeot) given their greatest exposure to Eurozone market troubles.
Liquidity -
GM : $38.5bn
Ford : $33.9bn
VW : €14.9bn vs €17bn (-14%) [$18.47bn]
BMW : €8.01bn vs €7.46bn (+7.5%) [$9.93bn]
Daimler : €12.09bn vs €9.84bn (+23%) [$15bn]
FIAT-Chrysler : €22.7bn vs €21.4bn (+6.5%) [$28.14bn].
Renault-Nissan : E11.1bn [$13.76bn]
Peugeot : €12.08bn [$15bn]
Toyota : Y1,728bn vs Y2,132bn (-19%) [$17.8bn]
Honda : Y1,247.1bn (cash & equiv) [$12.85bn].
Hyundai : KRW17,180bn (cash & equiv) [$15.15bn]
And finally, the importance of 'fiscal fire-power' during this transformative period is seen by the large reserves build-up by GM, Ford and FIAT-Chrysler, with VW and Toyota holding near equal value lower sums and Daimler, Hyundai and Peugeot close behind, with Renault-Nissan, Honda and BMW on lower levels.
Automakers' Positioning -
By the overtly simplistic indications of a) Revenue Increase, b) Net Profit, c) Earnings Per Share, d) Operating Cash Flow, e) Free Cash Flow and f) Liquidity, we see the dominant players per measure:
a) Revenue Increase: FIAT-Chrysler, Toyota, Honda, VW, Hyundai
b) Net Profit: Toyota, Honda, VW, Hyundai
c) EPS : Toyota, Honda, VW, (Hyundai assumed)
d) OCF : FIAT- Chrysler, Toyota
e) FCF: Ford, FIAT-Chrysler (estimated results)
f) Liquidity : GM, Ford, FIAT-Chrysler, VW, Toyota
Consistency goes to Toyota (5 of 6 placings), followed by VW & FIAT-Chrysler (4 of 6 placings), then Honda & Hyundai (3 of 6 placings), Ford (2 of 6 placings), GM (1 of 6 placings).
Unsurprisingly Renault-Nissan and Peugeot lagged heavily, but also too seemingly have BMW and Daimler failed to make a showing. This investment-auto-motives believes because of the BoD's operational consistency which provides slower but ongoing organic value creation, instead of the 'falter and rebound' growth opportunity seen by the aforementioned identified players.
Automaker's Context -
It became apparent some time ago that the dire effects of the credit crunch would most impact western mass market players with heavy exposure to their domestic markets, hence the experiences of previously GM and Chrysler, and now PSA, Renault and FIAT; with the premium/quality type producers with high export market exposure, demonstrated by BMW destined to fair far better, with the 'diversified premium' of Volkswagen and Daimler arguably on even more solid ground spanning B2C and B2C customers. The 'intermediates' of Toyota, Honda and Nissan were destined to sit between the two former groups, but themselves required internal re-structuring to remain competitive; this latterly ironically achieved as a consequence of the 'Great Eastern Japanese' disaster and the Thailand floods.
[NB The recent pan-Indian electrical power failures may induce a far smaller but significant force for auto-producer restructuring as companies seek to relocate to regions of assured power; aswell as obviously providing consulting and installation opportunities for major infrastructure players such as GE, Siemens etc]
As illustrated previously, perhaps the very obvious automotive beneficiary of the global downturn has been the strategically perfectly positioned Hyundai Motor Co with a balanced global sales and production foot-print and ever more attractive and price-compelling vehicle range. Whilst inside western markets for decades, its prime focus over the last decade was in BRIC and EM countries offering small cars and small trucks, then concentrating upon globally credible passenger vehicles as consumer expectations of the 'old-industrial' and 'emerged-industrial' countries began to merge.
However, as seen with the previous focus on Ford, western producers are positioned in course to return to strength if able to set their own paths: either through manifest strategic re-alignment of the intra-national business model (Ford), or through the deployment of large cash reserves via M&A and alliances (GM) or seeking - at smaller level – a combination of both (FIAT-Chrysler). The lessons learned within the US no doubt sought to be deployed by European companies / divisions.
The German corporates have remained strong thanks largely to the success born from the western boom years, their EM exporting models of 'visible' and 'invisible' products and services, the cautious retention of those cash cushions up until recently with now impressive CapEx programmes. These designed to secure industrial dominance domestically...in EM regions...and by virtue of the German 'home improvement plan' re-emphisising its historic role as Europe's industrial hub with powerful spokes now eminating north, west, south and east. .
Outlook -
So beneath the very apparent surface of the 2008-10 financial crisis, the EU sovereign debt and banking crisis, the natural disasters in Asia, the spectre of a technical or real double-dip recession, and so 'in turn' the outcome of heavily afflicted stock prices amongst many 'consumer cyclicals'... the necessary process of business re-invention has been under-way to re-position individual companies and the sector at large into the second decade of the 21st century and beyond.
Showing posts with label Hedge Funds VW. Show all posts
Showing posts with label Hedge Funds VW. Show all posts
Monday, 6 August 2012
Thursday, 4 February 2010
Company Focus – Daimler AG – E-Class & Global SMEs Provide Welcome Momentary Respite, But No Time To Procrastinate On The Cash Cushion
Daimler Stock Price (NYSE @ 14.30 on 04.02.2010)
$ 47.93
Daimler's Mercedes marque was historically the choice of the successful yet perhaps more somberly minded small and medium-sized business owner, the E-class symbolic of repute, respectability and longevity. The S-class was born to simultaneously feed the 1970s emergent demands from captains of European industry and petro-dollar rich Arabia, Maybach in turn re-playing that role in the 2000s. As the once separate remits and capabilities of the E & S class 4-door cars started to overlap, Daimler 'diversified' the E-class into an ever array of body-variants and relative 'characterisation' (eg Wagon/Estate vs Convertible) which in turn generated the successful CLS 4-door coupe.
[NB. This is of course to say nothing of the evolution of C, A & B Class & >smart, all which have had their own varying degree of success].
But in recent months it appears to have been Daimler's historical CofG – the E-class – which has assisted corporate fortunes and been the foundational strength behind revenue in a slowly emerging, yet still fragile, post crisis market.
The styling of the new 2009 model car set out to provide the Merc veteran with a new personality, a far more aggressive 'face', more dynamic side-elevation and varying levels of rear arch 'haunch' relative to body-style that mimics the Bentley aesthetic signature.
However, whilst undeniably cosmetically progressive, the most powerful generator of E-class purchases in Q409 & Q1 2010 has been the thawing of corporate credit in the US and W.Europe and paradoxically the very opposite in China. In the west, after what have been a tortuous 2008/9, those SME business owners still trading (albeit at low levels) and the C-suite execs who've internally driven corporate restructuring, have respectively rewarded themselves, or been awarded by Boards keen to retain talent, the provision of a new E-class. Critically it has been the marriage of accessible liquidity/credit, the model's best in class residual value, and - if running a fleet - the ability to negotiate discounted deals across cars & commercial vehicles, that has tempted western business owners & CFOs toward Daimler.
Indeed businesses are themselves using the Mercedes choice as a hallmark of their respectability and stability during this still dour economic phase. And for business lenders themselves, they guide their clients to buy company assets that maintain worth, for the sake of the balance sheet, and are relatively liquid in case of the need for quick resale to provide working capital liquidity if necessary. The Mercedes E-class qualifies on both counts. In mixed parlance, it has returned to its historical role as the consummate company 'investment vehicle'.
Ironically, in China it has been the very opposite micro-economic forces which have generated the major boost in E-class sales over the last few months.
The PRC's administration has in recent history been engaged in generally loose fiscal policy throughout much of the decade, weakened regulation suited to the growth of state backed enterprise, then in turn the use of massive reserves (US$ & Yuan) to provide free-flow financing to new enterprise, sectors and commerce. The average 10% GDP growth demonstrates the success. But that success became supercharged and by late 2008 the stock-market bubble was intentionally deflated, whilst post-Beijing Olympics it was recognised that China had to slow its rapid growth to stem domestic inflation, which in turn damaged the country's engrained low cost-structure and thus squeezed what was internationally seen as an unfairly undervalued Renminbi. Thus domestic economic policy and international relations have set the PRC government the task of maintaining the historic FX related productivity-gap, so in turn having to control-cool the economy. The major sign of this is heavily reduced lending to private & semi-private enterprise, this January's data showing the effective negative level of credit/liquidity decline to come.
That knowledge was well understood throughout November, December 09, thus Chinese business owners and senior level executives have been spending company cash on 'motivational incentives' in the knowledge that doing so later this year may not be an option, the notion of being seen to be excessive during future spend-thrift times, a social faux pas.
Thus on a turnover basis, Daimler has pleasingly witnessed a 26% YoY increase in E-class unit sales, contributing to the 13% Q409 vs Q408 improvement in total vehicle sales.
In what by historical norms historically a terrible US market, Daimler's YoY sales decrease bettered that of the luxury market TIV, with a -15% fall vs -21% fall. However, the tail end of 2009 and beginning of 2010 witnessed sizable 46% general sales improvement in a January YoY comparison, of which E-class improved by 116% and C-class 33%, whilst in the SUV sector M-class improved 42% and GLK 38%.
In Europe, unsurprisingly given the level of German domestic stimulus and electioneering related assistance to the economy, the homeland performed relatively well for Daimler, down 'only' -12% YoY, whilst the remainder of Europe actually saw an increase of 6% YoY, perhaps highlighting the better credit terms Mercedes buyers generally enjoy given their typical socio-economic profiles.
The UK led the sales rally with an increase of 46% YoY, a reflection seen by some that the UK led into the recession but also leads out of a technical recession.
But it is China over 2009 that buoys the majority of Mercedes momentum with sales up by 65% (70,100 vs 42,600 units, with December showing a 200+% YoY increase for largely we suspect the reasons previously outlined. S-class also maintains its relative ownership of the luxury sedan market, with 40% of sales for the sector.
Asia-Pacific as a whole saw 2009 economic bullishness convert into a 13% improvement in Mercedes sales, with a massive 77% YoY growth for December, possibly reflecting a mix of general enthusiasmm and those who believed China's economic curve was 'topping-out' and so given the level of Asia-Pac'seconomicc inter-relatedness, the reason to buy in the good times before the naturally expected slowdown. Positively, India – less trade connected to China – saw a 500% M-B sales growth in January YoY, though notably from a miserly high double-digit base, adding little to the bottom-line, but demonstrating retained M-B enthusiasm amongst older customers.
[NB S. Korea's own NPS state pension fund's own increased diversification into western European infrastructure plays - such as its 17% of the UK's Gatwick Airport – indicates the region's own slowed expectation of SE Asia's slowing].
[NB. Relative too India, sociologically M-B must combat a level of cultural dismissal from the 30-50 age group which has a partially entrenched view that Mercedes symbolises the older 'inward-looking' businessman of yesteryear, and not the globally aware (often globally educated) entrepreneur or corporate executive of today].
February 18th sees Daimler's annual investor's and analysts press conference, whilst preliminary full 2009 figures are made available on 2nd March. Until then as seen above, Daimler are understandably trying to assist positive external perceptions with typical good news stories.
Daimler has perhaps been best positioned as the 'middle player' within the exec market: between an over-capacity BMW, an increasingly popular globalised Audi (esp China/India) and (momentarily) 'Toyota-tainted' Lexus. As such expectantly the best all-round performer; given its continued resonance in testing times. Thus the resulting sales picture, regionally & globally, is on par with expectation that it would “beat the market” and gain executive share of mind and hence share of market. And again, expectantly, Daimler has targeted its biggest EU nations (Germany & UK) as its pillars of rebound growth.
As highlighted in previous conference calls, one real concern is whether the company is having to effectively 'buy market share' through reduced profit margins given the level of discount the likes of BMW and Audi can muster relative respectively to volume-leverage on 5-series and margin-leverage enabled by VW's scale. The typical corporate line from is that Daimler will not de-value its relatively new offering, especially as its 'volume x contribution' mix at the one-year stage is in normal times the earnings peak of any new model.
Another concern pertains to the level of flexibility Daimler has to further push cost-containment measures on its procurement and assembly of C, E & S-class cars, the large percentage of which are manufactured in Germany. Whilst C-class will gain US production to reduce assembly & distribution costs and negate the volatile Dollar-Euro FX gap, this does not occur until 2014 as part of what appears an implicit pledge to the German government and public. In the meantime, Daimler can only wish that the Dollar-Euro gap continues to shrink so as to aid the differential and avoid the additional overhead of FX hedging insurance.
With what seems little flexibility in its conventional cost-cutting regime at the assembly level at home, pressure bears upon other production regions (at lower volume) to slim costs and boost margins. However, as inflation costs rise so savings on input costs - if indeed attainable given that suppliers know such regions are important to Daimler – may be limited if any. Faced with this homeland vs RoW 'catch 22'. This circumstance of reaching an immoveable cost-floor will push Daimler to seek greater alliance co-operation with other EU based but ideally global-reach or global-ambition players: hence the rational regards previous BMW &/or PSA alliance regards Mini, A-class & B-class does not disappear. In the short-term Daimler should still seek procurement cost-containment measures and initiatives across its full range of vehicles, probably able to cite and endeavour to pass-on any 'unofficially sanctioned' dealer-floor discounting percentages levels it has been forced to absorb.
Like much of its European brethren, Daimler's breadth as both passenger and commercial vehicle manufacturer is core to its business model, and though recently painful, will provides dual strengths throughout the upward cycle of economic recovery once firmly underway. This is yet to happen in a fully fledged, convincing manner, though positive signs have appeared – as seen with EU & US sales. Working aligned to the fragile recovery will of course be key, but as stated previously Daimler is in the position of offering SME owners and corporations 'safe-have' choices when renewing their executive and operational vehicle fleets. But we have seen so far only tentative signs, and so presently Daimler's position and immediate success is not secured.
The company faces the positional paradox of being operationally constrained due to unavoidable political-economic pledges, yet awaiting the beginnings of true regional and global macro-economic pull to assist its conservative yet potentially powerful business model. The real problem it and peers face, is the apparent forthcoming Chinese & correlated Asia-Pac slowdown. This would affect most regions except a seemingly self perpetuating India, where unfortunately Daimler's own sales exposure is still rather limited relative to other regional sales capacities and it must overcome the culturally acquired/inherited resistance previously stated.
Hence in the meantime Daimler must carry-on 'as is'.
No doubt continuing to fill the good-news vacuum by credibly presenting itself as the auto-sector's Delphic Oracle on the issue of advanced low-CO2 future vehicles. But it is not enough to bias focus upon high-brow R&D strategy, when analysts want to see credible, yet understandably diminished, on-the-ground revenue-boosting and cost-cutting efforts. Finding additional ways to streamline costs, divest of remaining non-core assets, and the forging of additional alliance connections will better 'cut the mustard' at present. Of the latter, perhaps the most obvious related to the contract manufacture of its commercial vehicles for others as its Dodge partnership possibly reaches a natural end due to FIAT-Chrysler.
Dr Zetsche, Mr Uebber as CFO et al have done well to cautiously steer the group through such trecherous waters over recent years given the collapse in luxury car sales. It's decision to go to the bond markets in 2009 to add to its cash-pile whilst the liquidity-window was open was a wise move, so adding to its cash pile, totalling Euro 13.4bn ($19.2bn) in mid 2009. This good news given the CFO's statement that only Euro 8-9bn was needed annually (though we suspect Euro 9-10bn).
By Q309 Daimler had Industrial Cash Reserves of approx Euro 8.6bn + Financial Cash Reserves of
approx Euro 2.8bn, in all totalling Euro 11.498bn. The recent sales surge in the US, UK and China is indeed welcome, both industrial and captive finance divisions benefiting, and will undoubtedly be directed straight to its cash coffers. But present indicators depicts that this recent boost in all probability will be short-lived.
Given an appetite for self-funding companies investors will be pleased by Daimler's liquidity security, the recent top-up welcome, but equities investors in particular want to see strategic and tactical movement...to see the foundations of the next growth phase, to come in due course, being built. The longer that takes, combined with the signs of a possibly extended recession, the greater pressure that Daimler's cash pile be given back to the shareholders.
E-class and US & Chinese company-buyers have demonstrated their regard for Mercedes-Benz, Daimler AG must seize the evident goodwill to demonstrate its future worth to its clients and capital markets.
$ 47.93
Daimler's Mercedes marque was historically the choice of the successful yet perhaps more somberly minded small and medium-sized business owner, the E-class symbolic of repute, respectability and longevity. The S-class was born to simultaneously feed the 1970s emergent demands from captains of European industry and petro-dollar rich Arabia, Maybach in turn re-playing that role in the 2000s. As the once separate remits and capabilities of the E & S class 4-door cars started to overlap, Daimler 'diversified' the E-class into an ever array of body-variants and relative 'characterisation' (eg Wagon/Estate vs Convertible) which in turn generated the successful CLS 4-door coupe.
[NB. This is of course to say nothing of the evolution of C, A & B Class & >smart, all which have had their own varying degree of success].
But in recent months it appears to have been Daimler's historical CofG – the E-class – which has assisted corporate fortunes and been the foundational strength behind revenue in a slowly emerging, yet still fragile, post crisis market.
The styling of the new 2009 model car set out to provide the Merc veteran with a new personality, a far more aggressive 'face', more dynamic side-elevation and varying levels of rear arch 'haunch' relative to body-style that mimics the Bentley aesthetic signature.
However, whilst undeniably cosmetically progressive, the most powerful generator of E-class purchases in Q409 & Q1 2010 has been the thawing of corporate credit in the US and W.Europe and paradoxically the very opposite in China. In the west, after what have been a tortuous 2008/9, those SME business owners still trading (albeit at low levels) and the C-suite execs who've internally driven corporate restructuring, have respectively rewarded themselves, or been awarded by Boards keen to retain talent, the provision of a new E-class. Critically it has been the marriage of accessible liquidity/credit, the model's best in class residual value, and - if running a fleet - the ability to negotiate discounted deals across cars & commercial vehicles, that has tempted western business owners & CFOs toward Daimler.
Indeed businesses are themselves using the Mercedes choice as a hallmark of their respectability and stability during this still dour economic phase. And for business lenders themselves, they guide their clients to buy company assets that maintain worth, for the sake of the balance sheet, and are relatively liquid in case of the need for quick resale to provide working capital liquidity if necessary. The Mercedes E-class qualifies on both counts. In mixed parlance, it has returned to its historical role as the consummate company 'investment vehicle'.
Ironically, in China it has been the very opposite micro-economic forces which have generated the major boost in E-class sales over the last few months.
The PRC's administration has in recent history been engaged in generally loose fiscal policy throughout much of the decade, weakened regulation suited to the growth of state backed enterprise, then in turn the use of massive reserves (US$ & Yuan) to provide free-flow financing to new enterprise, sectors and commerce. The average 10% GDP growth demonstrates the success. But that success became supercharged and by late 2008 the stock-market bubble was intentionally deflated, whilst post-Beijing Olympics it was recognised that China had to slow its rapid growth to stem domestic inflation, which in turn damaged the country's engrained low cost-structure and thus squeezed what was internationally seen as an unfairly undervalued Renminbi. Thus domestic economic policy and international relations have set the PRC government the task of maintaining the historic FX related productivity-gap, so in turn having to control-cool the economy. The major sign of this is heavily reduced lending to private & semi-private enterprise, this January's data showing the effective negative level of credit/liquidity decline to come.
That knowledge was well understood throughout November, December 09, thus Chinese business owners and senior level executives have been spending company cash on 'motivational incentives' in the knowledge that doing so later this year may not be an option, the notion of being seen to be excessive during future spend-thrift times, a social faux pas.
Thus on a turnover basis, Daimler has pleasingly witnessed a 26% YoY increase in E-class unit sales, contributing to the 13% Q409 vs Q408 improvement in total vehicle sales.
In what by historical norms historically a terrible US market, Daimler's YoY sales decrease bettered that of the luxury market TIV, with a -15% fall vs -21% fall. However, the tail end of 2009 and beginning of 2010 witnessed sizable 46% general sales improvement in a January YoY comparison, of which E-class improved by 116% and C-class 33%, whilst in the SUV sector M-class improved 42% and GLK 38%.
In Europe, unsurprisingly given the level of German domestic stimulus and electioneering related assistance to the economy, the homeland performed relatively well for Daimler, down 'only' -12% YoY, whilst the remainder of Europe actually saw an increase of 6% YoY, perhaps highlighting the better credit terms Mercedes buyers generally enjoy given their typical socio-economic profiles.
The UK led the sales rally with an increase of 46% YoY, a reflection seen by some that the UK led into the recession but also leads out of a technical recession.
But it is China over 2009 that buoys the majority of Mercedes momentum with sales up by 65% (70,100 vs 42,600 units, with December showing a 200+% YoY increase for largely we suspect the reasons previously outlined. S-class also maintains its relative ownership of the luxury sedan market, with 40% of sales for the sector.
Asia-Pacific as a whole saw 2009 economic bullishness convert into a 13% improvement in Mercedes sales, with a massive 77% YoY growth for December, possibly reflecting a mix of general enthusiasmm and those who believed China's economic curve was 'topping-out' and so given the level of Asia-Pac'seconomicc inter-relatedness, the reason to buy in the good times before the naturally expected slowdown. Positively, India – less trade connected to China – saw a 500% M-B sales growth in January YoY, though notably from a miserly high double-digit base, adding little to the bottom-line, but demonstrating retained M-B enthusiasm amongst older customers.
[NB S. Korea's own NPS state pension fund's own increased diversification into western European infrastructure plays - such as its 17% of the UK's Gatwick Airport – indicates the region's own slowed expectation of SE Asia's slowing].
[NB. Relative too India, sociologically M-B must combat a level of cultural dismissal from the 30-50 age group which has a partially entrenched view that Mercedes symbolises the older 'inward-looking' businessman of yesteryear, and not the globally aware (often globally educated) entrepreneur or corporate executive of today].
February 18th sees Daimler's annual investor's and analysts press conference, whilst preliminary full 2009 figures are made available on 2nd March. Until then as seen above, Daimler are understandably trying to assist positive external perceptions with typical good news stories.
Daimler has perhaps been best positioned as the 'middle player' within the exec market: between an over-capacity BMW, an increasingly popular globalised Audi (esp China/India) and (momentarily) 'Toyota-tainted' Lexus. As such expectantly the best all-round performer; given its continued resonance in testing times. Thus the resulting sales picture, regionally & globally, is on par with expectation that it would “beat the market” and gain executive share of mind and hence share of market. And again, expectantly, Daimler has targeted its biggest EU nations (Germany & UK) as its pillars of rebound growth.
As highlighted in previous conference calls, one real concern is whether the company is having to effectively 'buy market share' through reduced profit margins given the level of discount the likes of BMW and Audi can muster relative respectively to volume-leverage on 5-series and margin-leverage enabled by VW's scale. The typical corporate line from is that Daimler will not de-value its relatively new offering, especially as its 'volume x contribution' mix at the one-year stage is in normal times the earnings peak of any new model.
Another concern pertains to the level of flexibility Daimler has to further push cost-containment measures on its procurement and assembly of C, E & S-class cars, the large percentage of which are manufactured in Germany. Whilst C-class will gain US production to reduce assembly & distribution costs and negate the volatile Dollar-Euro FX gap, this does not occur until 2014 as part of what appears an implicit pledge to the German government and public. In the meantime, Daimler can only wish that the Dollar-Euro gap continues to shrink so as to aid the differential and avoid the additional overhead of FX hedging insurance.
With what seems little flexibility in its conventional cost-cutting regime at the assembly level at home, pressure bears upon other production regions (at lower volume) to slim costs and boost margins. However, as inflation costs rise so savings on input costs - if indeed attainable given that suppliers know such regions are important to Daimler – may be limited if any. Faced with this homeland vs RoW 'catch 22'. This circumstance of reaching an immoveable cost-floor will push Daimler to seek greater alliance co-operation with other EU based but ideally global-reach or global-ambition players: hence the rational regards previous BMW &/or PSA alliance regards Mini, A-class & B-class does not disappear. In the short-term Daimler should still seek procurement cost-containment measures and initiatives across its full range of vehicles, probably able to cite and endeavour to pass-on any 'unofficially sanctioned' dealer-floor discounting percentages levels it has been forced to absorb.
Like much of its European brethren, Daimler's breadth as both passenger and commercial vehicle manufacturer is core to its business model, and though recently painful, will provides dual strengths throughout the upward cycle of economic recovery once firmly underway. This is yet to happen in a fully fledged, convincing manner, though positive signs have appeared – as seen with EU & US sales. Working aligned to the fragile recovery will of course be key, but as stated previously Daimler is in the position of offering SME owners and corporations 'safe-have' choices when renewing their executive and operational vehicle fleets. But we have seen so far only tentative signs, and so presently Daimler's position and immediate success is not secured.
The company faces the positional paradox of being operationally constrained due to unavoidable political-economic pledges, yet awaiting the beginnings of true regional and global macro-economic pull to assist its conservative yet potentially powerful business model. The real problem it and peers face, is the apparent forthcoming Chinese & correlated Asia-Pac slowdown. This would affect most regions except a seemingly self perpetuating India, where unfortunately Daimler's own sales exposure is still rather limited relative to other regional sales capacities and it must overcome the culturally acquired/inherited resistance previously stated.
Hence in the meantime Daimler must carry-on 'as is'.
No doubt continuing to fill the good-news vacuum by credibly presenting itself as the auto-sector's Delphic Oracle on the issue of advanced low-CO2 future vehicles. But it is not enough to bias focus upon high-brow R&D strategy, when analysts want to see credible, yet understandably diminished, on-the-ground revenue-boosting and cost-cutting efforts. Finding additional ways to streamline costs, divest of remaining non-core assets, and the forging of additional alliance connections will better 'cut the mustard' at present. Of the latter, perhaps the most obvious related to the contract manufacture of its commercial vehicles for others as its Dodge partnership possibly reaches a natural end due to FIAT-Chrysler.
Dr Zetsche, Mr Uebber as CFO et al have done well to cautiously steer the group through such trecherous waters over recent years given the collapse in luxury car sales. It's decision to go to the bond markets in 2009 to add to its cash-pile whilst the liquidity-window was open was a wise move, so adding to its cash pile, totalling Euro 13.4bn ($19.2bn) in mid 2009. This good news given the CFO's statement that only Euro 8-9bn was needed annually (though we suspect Euro 9-10bn).
By Q309 Daimler had Industrial Cash Reserves of approx Euro 8.6bn + Financial Cash Reserves of
approx Euro 2.8bn, in all totalling Euro 11.498bn. The recent sales surge in the US, UK and China is indeed welcome, both industrial and captive finance divisions benefiting, and will undoubtedly be directed straight to its cash coffers. But present indicators depicts that this recent boost in all probability will be short-lived.
Given an appetite for self-funding companies investors will be pleased by Daimler's liquidity security, the recent top-up welcome, but equities investors in particular want to see strategic and tactical movement...to see the foundations of the next growth phase, to come in due course, being built. The longer that takes, combined with the signs of a possibly extended recession, the greater pressure that Daimler's cash pile be given back to the shareholders.
E-class and US & Chinese company-buyers have demonstrated their regard for Mercedes-Benz, Daimler AG must seize the evident goodwill to demonstrate its future worth to its clients and capital markets.
Friday, 29 January 2010
Company Focus – VW AG – St James's and the Giant Piech
VW Share Price (@ 12.36pm 29.01.2010)
- Ordinary : Euro 64.96
- Preference: Euro 57.54
From the Upper East Side and St James's comes news that members of the hedge fund industry have been considering how best to buoy their own coffers, heavily sunk in part by what they consider misrepresentation by Porsche management at the time of the intended VW buy-out.
As history has shown, that intention was given a swift about-turn as over-extended by debt, Porsche was swallowed by VW AG. A second critique comes from institutional investors, concerned at the price VW is paying for Porsche Holdings AG, with the conjecture that the Piech and Porsche families will be the major beneficiaries at the cost of large shareholders.
In Germany, where the machinations of industrial engineering meets financial engineering, Prof. Ferdinand Piech sits centre-stage seemingly unperturbed.
Unquestionably the strongest of the Europeans presently, VW's 2009 turnover has been greatly assisted by still relatively strong sales in its Chinese & Brazilian strong-holds, add to which the benefit provided as a substantial recipient of EU scrappage schemes. The VW Group, its core and satellite brands and a now well entrenched with eco-sub-brands assisting (eg Bluemotion, GreenLine etc) could be argued as having to date largely won the eco-perception battle amongst the public. This volume & profile mix ensured VW had a record number of deliveries in 2009 at 6.29m units (+1.1% YoY). As such VW presently 'sits pretty'.
Beyond the market sqawk, VW has auto-sector strength, in terms of market share, model mix, pricing power with consumers, the introduction of the low-cost A3 platform, industry leading flexible manufacture across sites, and on the back of these the ability to drive economies of scale with international component suppliers relative to local and Euro FX conditions.
Moreover the stated cross-sharing alliance with Suzuki is a positive sector-shifting move. It obviously chosen as a pragmatic alternative to the heavy investment required, and long-pay-back period of a new, advanced tech, small car programme (ie Up! In contrast to 2nd world Fox). We suspect it's manifest agenda was two-fold: To protect still highly prized liquidity on the balance sheet and hasten the launch of a market leading small car under Polo.
At the strategic level, beyond a reduced cost option versus domestic development, the alliance also creates geographic, further fiscal and strategic options and opportunities: Piech has witnessed Machionne and Ghosn develop direct and indirect Indian ties with respectively TATA and Bajaj, and shrewdly sees a possible greater value-adding multi-play via Suzuki with:
1. Europe – possibly replaying the PSA-Toyota manufacturing alliance in a CEE location
2. India – piggy-backing Suzuki-Maruti presence in manufacturing and distribution.
3. Japan – dual forces with enhanced VW presence to take advantage of Toyota woes.
4. S. America – dual forces to squeeze VW competitors (esp Ford & FIAT)
5. Financing – Ability to tap liquid Japanese banks at 0.1% base-rate thru' probable weakening Yen
6. Strategy – Ability to tap into Suzuki's broad and deep 'cars to quads to motor-cycles' capability.
In short, as Europe starts to enter its own 'Kei' car' era, VW wishes to leverage learning and synergies from perhaps the world's best small car maker with expansive personal mobility reach.
Within its core of Western Europe it identifies the A & B segments as its prime targets, given what it sees (or perhaps likes to purvey) as a lack of variant model presence across: notchback, estate, MPV, van , coupe, cabrio & roadster variants.
Q309 reported data shows that VW Group holds #1 in Germany( with 21% market share) , China & Brazil and holds 11.7% of global TIV (up from 10% YoY), but warns of caution for 2010 even if well placed in EM markets such as India and Russia.
The VW brand shows success with Jan-Sept 09 deliveries up 1.5%, September of major benefit seeing a 22.8% (extra-ordinary) single month rise (mainly due to local & global scrappage incentive schemes for lower CO2 emissions smaller cars . Internationally Gol maintains its performance in Mercosaur region whilst in China Jetta, (Newish) Lavida and Passat benefit from the both return 'loyalty' purchases and 'flight to safety' migration from other newer (less proven) Chinese domestic automakers.
In recent presentations (ie Hans Dieter Potsche) VW tries to demonstrate how it created firm foundations through the boom period. This then provides room to proactively manage through the economic trough and maintain focus upon the typical efficiency levers:
a) “Working Capital optimisation” via efficacious inventory management,
b) “Constant CapEx review”,
c) “Maximise Liquidity”,
d) “Cost Discipline”,
e) “Flexible Labour Contracts”,
f) “Managing Production Capacity”.
The Q309 report stated an increased CapEx to Sales Revenue quotient of 5.7% (from 4.9%), now quoted as industry standard, is largely the result of the ratio-effect due to declined sales revenues
VW states that E25.8bn is to be invested over next 3 years (2010-1012), of which E19.9bn CapEx directed at property, pant and equipment. Approximately E10bn of that will be spend directly in Germany, presumably to demonstrate its commitment to the German people and importantly grow favour with Lower Saxony (its 20% 'supervisory' shareholder).
VW Group's product strategy foundations will continue as normal with a "multi-brand modular matrix" strategy previously seen with the A4 platform since the mid 1990s, now extended in technical sophistication and model reach with the slightly smaller FWD A3 platform set (known as MQB) [with the larger RWD set known as MLB]. This includes greater integration of automatic gearboxes which highlights the ambition toward greater US and non-EU mix.
New plant and equipment acquisition and investment are noted relative to construction of a new USA plant due for 'SoP' in 2011, and Porsche (platform & capability) integration with its purchase of the Karmann Osnabruck (niche vehicle) site.
However, amongst the positive SEAT continues to struggle and is the Achilles heal of the group, its offering of married practicality & sportiness effectively unrecognised due to lack of brand resonance amongst consumers. However, after decades of various motorsport campaigning, SEAT has had 2009 WTCC success, the most high profile of which were #1,#2,#3,#4 positions at the Brazilian round. This theoretically creates a launch-pad for the brand in Brazil, with the possibility to leverage SEAT's cultural connections to the 'old world'.
With few other automakers as well placed we conject that Ferdinand Piech will be using his strong corporate performance, with liquidity, to combat institutional investor concerns regards over-payment for the Porsche division. However, it is that corporate liquidity that has also drawn the eyes of the aggrieved US hedge funds and the reported considered $1bn filing.
It is conceivable that this action has been stirred so as to both gain much sought after cash - given the level of recent fund withdrawls - from VW, and to possibly dampen the present Porsche share price so that hedge-funds could purchase Porsche stock at a discount prior to the beginning of the VW's own Porsche stock buy-back. Thus ironically possibly using VW sourced cash to purchase a hiked Porsche stock to help compensate for the original massive losses.
However, recent news highlights that it is the UK's St James's players that prefer a less confrontational approach. There is still much value left in the giant VW 'peach', it appears both St James's and Prof. Peich well recognise that fact.
- Ordinary : Euro 64.96
- Preference: Euro 57.54
From the Upper East Side and St James's comes news that members of the hedge fund industry have been considering how best to buoy their own coffers, heavily sunk in part by what they consider misrepresentation by Porsche management at the time of the intended VW buy-out.
As history has shown, that intention was given a swift about-turn as over-extended by debt, Porsche was swallowed by VW AG. A second critique comes from institutional investors, concerned at the price VW is paying for Porsche Holdings AG, with the conjecture that the Piech and Porsche families will be the major beneficiaries at the cost of large shareholders.
In Germany, where the machinations of industrial engineering meets financial engineering, Prof. Ferdinand Piech sits centre-stage seemingly unperturbed.
Unquestionably the strongest of the Europeans presently, VW's 2009 turnover has been greatly assisted by still relatively strong sales in its Chinese & Brazilian strong-holds, add to which the benefit provided as a substantial recipient of EU scrappage schemes. The VW Group, its core and satellite brands and a now well entrenched with eco-sub-brands assisting (eg Bluemotion, GreenLine etc) could be argued as having to date largely won the eco-perception battle amongst the public. This volume & profile mix ensured VW had a record number of deliveries in 2009 at 6.29m units (+1.1% YoY). As such VW presently 'sits pretty'.
Beyond the market sqawk, VW has auto-sector strength, in terms of market share, model mix, pricing power with consumers, the introduction of the low-cost A3 platform, industry leading flexible manufacture across sites, and on the back of these the ability to drive economies of scale with international component suppliers relative to local and Euro FX conditions.
Moreover the stated cross-sharing alliance with Suzuki is a positive sector-shifting move. It obviously chosen as a pragmatic alternative to the heavy investment required, and long-pay-back period of a new, advanced tech, small car programme (ie Up! In contrast to 2nd world Fox). We suspect it's manifest agenda was two-fold: To protect still highly prized liquidity on the balance sheet and hasten the launch of a market leading small car under Polo.
At the strategic level, beyond a reduced cost option versus domestic development, the alliance also creates geographic, further fiscal and strategic options and opportunities: Piech has witnessed Machionne and Ghosn develop direct and indirect Indian ties with respectively TATA and Bajaj, and shrewdly sees a possible greater value-adding multi-play via Suzuki with:
1. Europe – possibly replaying the PSA-Toyota manufacturing alliance in a CEE location
2. India – piggy-backing Suzuki-Maruti presence in manufacturing and distribution.
3. Japan – dual forces with enhanced VW presence to take advantage of Toyota woes.
4. S. America – dual forces to squeeze VW competitors (esp Ford & FIAT)
5. Financing – Ability to tap liquid Japanese banks at 0.1% base-rate thru' probable weakening Yen
6. Strategy – Ability to tap into Suzuki's broad and deep 'cars to quads to motor-cycles' capability.
In short, as Europe starts to enter its own 'Kei' car' era, VW wishes to leverage learning and synergies from perhaps the world's best small car maker with expansive personal mobility reach.
Within its core of Western Europe it identifies the A & B segments as its prime targets, given what it sees (or perhaps likes to purvey) as a lack of variant model presence across: notchback, estate, MPV, van , coupe, cabrio & roadster variants.
Q309 reported data shows that VW Group holds #1 in Germany( with 21% market share) , China & Brazil and holds 11.7% of global TIV (up from 10% YoY), but warns of caution for 2010 even if well placed in EM markets such as India and Russia.
The VW brand shows success with Jan-Sept 09 deliveries up 1.5%, September of major benefit seeing a 22.8% (extra-ordinary) single month rise (mainly due to local & global scrappage incentive schemes for lower CO2 emissions smaller cars . Internationally Gol maintains its performance in Mercosaur region whilst in China Jetta, (Newish) Lavida and Passat benefit from the both return 'loyalty' purchases and 'flight to safety' migration from other newer (less proven) Chinese domestic automakers.
In recent presentations (ie Hans Dieter Potsche) VW tries to demonstrate how it created firm foundations through the boom period. This then provides room to proactively manage through the economic trough and maintain focus upon the typical efficiency levers:
a) “Working Capital optimisation” via efficacious inventory management,
b) “Constant CapEx review”,
c) “Maximise Liquidity”,
d) “Cost Discipline”,
e) “Flexible Labour Contracts”,
f) “Managing Production Capacity”.
The Q309 report stated an increased CapEx to Sales Revenue quotient of 5.7% (from 4.9%), now quoted as industry standard, is largely the result of the ratio-effect due to declined sales revenues
VW states that E25.8bn is to be invested over next 3 years (2010-1012), of which E19.9bn CapEx directed at property, pant and equipment. Approximately E10bn of that will be spend directly in Germany, presumably to demonstrate its commitment to the German people and importantly grow favour with Lower Saxony (its 20% 'supervisory' shareholder).
VW Group's product strategy foundations will continue as normal with a "multi-brand modular matrix" strategy previously seen with the A4 platform since the mid 1990s, now extended in technical sophistication and model reach with the slightly smaller FWD A3 platform set (known as MQB) [with the larger RWD set known as MLB]. This includes greater integration of automatic gearboxes which highlights the ambition toward greater US and non-EU mix.
New plant and equipment acquisition and investment are noted relative to construction of a new USA plant due for 'SoP' in 2011, and Porsche (platform & capability) integration with its purchase of the Karmann Osnabruck (niche vehicle) site.
However, amongst the positive SEAT continues to struggle and is the Achilles heal of the group, its offering of married practicality & sportiness effectively unrecognised due to lack of brand resonance amongst consumers. However, after decades of various motorsport campaigning, SEAT has had 2009 WTCC success, the most high profile of which were #1,#2,#3,#4 positions at the Brazilian round. This theoretically creates a launch-pad for the brand in Brazil, with the possibility to leverage SEAT's cultural connections to the 'old world'.
With few other automakers as well placed we conject that Ferdinand Piech will be using his strong corporate performance, with liquidity, to combat institutional investor concerns regards over-payment for the Porsche division. However, it is that corporate liquidity that has also drawn the eyes of the aggrieved US hedge funds and the reported considered $1bn filing.
It is conceivable that this action has been stirred so as to both gain much sought after cash - given the level of recent fund withdrawls - from VW, and to possibly dampen the present Porsche share price so that hedge-funds could purchase Porsche stock at a discount prior to the beginning of the VW's own Porsche stock buy-back. Thus ironically possibly using VW sourced cash to purchase a hiked Porsche stock to help compensate for the original massive losses.
However, recent news highlights that it is the UK's St James's players that prefer a less confrontational approach. There is still much value left in the giant VW 'peach', it appears both St James's and Prof. Peich well recognise that fact.
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