MAN SE Appears to be Heading Toward Further Earnings Setbacks

The European economic crisis is claiming another victim, as analysts slash their earnings forecasts for struggling German truck manufacturer MAN SE (MANG.DE).

Among those companies being hit by Europe’s ongoing economic woes, truck manufacturer MAN SE (MANG.DE) is a standout – for all the wrong reasons. While its controlling shareholder, Volkswagen AG (VOWG_p.DE), has benefitted from a big pile of cash on its books and low borrowing costs and has managed to boost its market share, MAN has seen the European crisis wreak havoc on its core business. The construction firms and other long-distance transportation ventures that remain MAN’s biggest group of customers have seen their business suffer, and in turn have cut back on their orders with MAN. Now, after reporting that its profits nosedived in the third quarter, MAN has begun a series of production line stoppages likely to least until early January.

But the bad news doesn’t seem to be anywhere close to ending. Over the last year, analysts have slashed their earnings forecasts for MAN’s earnings for the full year of 2012, and in recent months the pace and magnitude of those cuts have picked up dramatically. The current consensus is that the truck maker will report net income of 3.30 euros per share when it announces its results for the year on February 8, 2013. But the StarMine SmartEstimate – calculated based on the most recent earnings forecasts and those by the analysts with the most accurate track records – currently stands at only 2.96 euros per share. The percentage difference between these two forecasts – the Predicted Surprise – is thus a negative figure, of -10.2%, signaling that there is a high probability that either MAN will fail to report earnings that measure up to the consensus estimate, or that that I/B/E/S forecast will fall further still between now and the date on which MAN reports its results.

Analyst sentiment remains bearish indeed, as indicated by the fact that MAN scores only 38 out of a possible 100 on the StarMine Analyst Revisions Model. Indeed, that score may in fact be artificially high, if it weren’t for the fact that so many of its competitors across Europe are also suffering, the company’s fundamentals suggest that it would have a much lower score.

The slump in demand has caused an uptick in inventory levels, reflected in the chart below as the number of days of average sales the company holds in inventory at present. The company clearly hopes that suspending production lines at two of its facilities for four weeks over the next two months will help address this problem.

Moreover, the company has pledged to continue to work to cut costs, perhaps by trimming salaries and having the German government pick up park of the slack under a special short-term subsidy program. Those cost-cutting measures may help the company improve its bottom line to meet short-term expectations, it is the full year period for which analysts have cut their estimates so dramatically.

Although MAN did report a profit of 57 million euros for the quarter ended September 2012, its free cash flow in the period was negative, a drain of 430 euros. Research by StarMine has shown that that earnings that are supported by strong cash flows tend to be more sustainable than profits that are underpinned only by negative cash flows.

Meanwhile, the market awaits proof that Volkswagen can forge a truck manufacturing alliance between MAN and Sweden’s Scania AB (SVKBF.PK), in which Volkswagen also has a controlling stake. Scania also has seen a decline in sales and profits.

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