Daimler seems to have taken a lead from BMW in keeping its 2015 profit outlook conservative to avoid any risk whatsoever of potentially giving the financial markets an unpleasant surprise later in the year.
The automaker reported Tuesday that quarterly EBIT increased 41 percent to 2.93 billion euros ($3.19 billion) with results from its cars, trucks, vans units and even its China joint venture all positively surprising the market, as did the earnings quality.
Perhaps more surprising, Daimler said second-half results will be better than the first half despite a seasonally strong second quarter just ahead.
So why isn’t the company upgrading its earnings guidance? It reaffirmed its forecast for a “significant increase” in operating profits from continuing operations, which merely means a percentage gain in the double-digits - something already more than achieved in the first quarter with its 40 percent-plus surge.
Speaking to journalists during a conference call, finance chief Bodo Uebber would not forecast when Mercedes will achieve its targeted 10 percent return on sales, saying only that the division “will approach its margin target step by step.”
Profitability at the core Mercedes car division was 9.2 percent in the first quarter and analysts saw no reason to believe it has peaked. “In individual quarters this year, Daimler should even be capable of showing Audi and BMW its rear lights in terms of margins,” wrote NordLB analyst Frank Schwope. Audi posted a Q1 margin of 9.7 percent on Wednesday, but BMW, whose automotive division recorded a 9.6 percent return on sales last year, isn’t due to publish quarterly results until next Wednesday.
So why isn’t Daimler upgrading its earnings guidance?
It’s not because the higher costs from new model launches and rising depreciation could amount to around 100 million euros in added net costs in each of the coming three quarters, according to management. Nor is it the material one-off restructuring charges to come as more wholly-owned Mercedes dealerships are sold off in Germany. The sell-off will cost the company as much as a half billion euros through the end of next year, of which only 20 million so far has been booked.
Analysts say it’s not even the deteriorating sales mix, with a greater share of its sales set to come from less profitable small cars. These include its popular range of compacts, such as the GLA, as well as the second-generation Smart ForTwo, which is steadily being rolled out globally since its European launch in November.
The reason is that Daimler has been burned too many times from its own overly optimistic forecasts. “They’ve over-promised and under-delivered in the past, but we now think there has been a distinct management style to err on the side of caution,” said Barclays auto analyst Kristina Church. “So if they don’t need to give more concrete guidance at this point in the year, they see no reason to.”
In the past, Daimler was much more forthcoming with concrete, quantitatively precise earnings targets that set it apart from the vaguely formulated expectations often published by BMW and Volkswagen. But during Daimler’s darker days, especially around late 2012, it repeatedly had to revise these lower and has since learned its lesson after taking a regular beating from the market.
“We’ve gotten away from that habit,” said one source at the company. Now it seems to have adopted BMW’s “under-promise and over-deliver” mantra.
Fortunately the company did give the market a small taste of its confidence. Free cash flow (FCF), which tells investors whether earnings growth is based on accounting gimmicks or actually backed up by cold, hard cash, was previously expected to be in a range that was significantly higher than the 2.6 billion euros paid out in dividends earlier this month but significantly lower than last year’s 5.5 billion cash generation given its investment plan. Now the company expects the figure at the upper end of that range – possibly in part because a weak euro will be a huge boon to business.