Europe’s sputtering economy and a competitive market in China are stalling earnings and revenues at car and truck manufacturer Daimler AG. Furthermore, weak cash flows and falling margins are contributing to poor earnings quality.
The European economic slowdown slashed demand for cars and trucks. Germany’s Daimler AG (DAIGn.DE) — maker of Mercedes Benz luxury cars — has seen a slowdown in sales, and margins fell further in the first quarter of 2013. This trend is likely to continue into the second quarter, according to this news release by Reuters News. The company wants to overtake Audi and BMW as the world’s largest luxury car manufacturer by 2020, but that goal now may seem too lofty. In the fastest growing luxury car market — China — it’s losing ground to its rivals. Based on a weak StarMine Earnings Quality (EQ) model score of 8, it looks like earnings may not be coming from sustainable sources and the company may hit some potholes in the quarters to come.
Monitor cash flow
The chart below, left, shows that Daimler’s capital expenditures have exceeded cash flow from operations for the last 10 consecutive quarters. Capital expenditure not funded from operations is a sign of poor earnings quality. In the chart on the right, the red bars represent the amount by which free cash flow lags net income. In the last 10 quarters, free cash flow has not only lagged net income, but has also been negative. In the latest reported quarter, while net income was 536 million euros, free cash flow of -624 million euros was negative and lagged net income by over a billion euros. Earnings backed by strong cash flows tend to be more sustainable than those backed by poor cash flows.
Source: Datastream Professional / StarMine
Watch margins
The chart below shows the three most popular margin measures — gross, net and operating. Operating margin and gross margin have been falling steadily for the last five quarters and are their lowest levels in three years at 3.9% and 24.9%, respectively. Net margin is also at its lowest level in three years at 2.1%. Margins continue to fall despite cost saving measures. Increased competitive pressure from other luxury car makers could be one reason for the falling margins.
Source: Datastream Professional / StarMine
Look at inventory
Daimler reported inventory days at 85, the highest level in three years. This could be an indicator of poor inventory management and a sign that the company may not be hitting sales targets. It could also point to a new product cycle with the launch of new line of cars, so keep an eye on inventory days in the quarters to come. The company also reported that accounts receivable days are at 105, also a three-year high. That could mean that it is becoming less efficient in collecting cash from its customers. Both are signs of poor earnings quality and contribute to the low StarMine EQ score.
The company reported disappointing first quarter earnings on April 24, 2013, and cited weakness in Europe as one of the main factors. Despite strong growth in China (which based on this Reuters News article may slow down further in the coming year), the company’s car sales by units was flat year over year and revenue was actually 3% lower for the quarter.
Daimler reported earnings of 5.25 euros per share for 2012, down from 5.52 euros per share in 2011. Analysts have lowered estimates for the 2013 fiscal year and the consensus is for earnings of 4.76 euros, which would mean two consecutive years of shrinking earnings. In fact, there are three analysts (5-star rated by StarMine for their historical accuracy) who have “Bold Estimates” that are far below the consensus. That could be a sign that the consensus estimates for 2013 may be brought down even further, in line with these 5-star analysts.
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