Daimler, the parent company of Mercedes-Benz, experienced a significant drop in its share price as a direct consequence of a revised profit forecast. This downturn, observed on a Monday trading session, saw Benz Share Price dive nearly 3%, reflecting investor concerns over mounting costs associated with diesel emission irregularities.
The German automotive giant issued a profit warning, citing that its second-quarter profits would be negatively impacted to the tune of a “high three-digit-million” euro sum. This financial setback stems from the discovery of unauthorized software utilized in certain diesel engines, designed to manipulate and understate actual levels of harmful emissions. This revelation marks the third instance since 2018 where Daimler has had to issue a profit warning, signaling deeper systemic challenges. The company now anticipates its 2019 operating profit to closely mirror the previous year’s 11.1 billion euros ($12.6 billion), a downward revision from earlier predictions of improved earnings.
Financial analysts have estimated the anticipated financial hit to range between 600 to 800 million euros ($683 million to $911 million). This burden is expected to be distributed, with approximately two-thirds affecting the van division and the remaining third impacting Mercedes-Benz cars.
Citi Research offered a perspective that went beyond the immediate profit warning, suggesting potential risks extending into 2020 earnings. Their analysis points to a combination of cyclical and structural issues, compounded by historical accounting practices within Daimler. A key concern highlighted by Citi Research analyst Angus Tweedie is the delayed launch of the GLE SUV. This delay is expected to limit the anticipated “mix benefit” that management had previously projected, further pressuring earnings. Structurally, the analysis suggests that auto margins may need to adjust downwards to the 5-6% range. This adjustment would reflect the impact of previously capitalized development costs now affecting profit and loss statements, the substantial investments required for vehicle electrification, and a less optimistic outlook for consumer credit and overall sales volumes. Tweedie concluded that the central discussion for investors should revolve around the trajectory of earnings decline, rather than simply the ultimate low point.
Evercore ISI, another investment research firm, echoed concerns about broader industry-wide challenges. They suggested that Daimler’s current predicament is likely symptomatic of a wider dilemma facing major automakers globally. The profit warnings are seen as detrimental to auto industry valuations across the board, particularly as the sector grapples with unprecedented emission challenges. Mercedes-Benz, for instance, faces a daunting task of improving fuel efficiency in the EU by 22% by 2021. Evercore ISI estimates potential penalty risks for Mercedes alone at around 2.7 billion euros ($3.1 billion), with compliance costs adding a further 1.73 billion euros ($2.0 billion).
Beyond regulatory pressures, the automotive industry is facing a significant market downturn. Germany’s Center for Automotive Research (CAR) has cautioned that the global car market is poised for its most significant contraction since the 2008 financial crisis, with projected sales declines exceeding 4 million vehicles in 2019. This downturn, attributed to factors such as U.S. sanctions policies and a sharp decline in Chinese sales, is expected to persist for several years. The challenges are further compounded by stringent CO2 regulations and the forced transition towards electric vehicle adoption in Europe, according to CAR. Their report starkly states that “The year 2019 will be more stressful for the auto industry worldwide than in 2009,” emphasizing that the projected global sales decline is twice as severe as during the global financial crisis.
By midday trading in Europe, the Daimler share price had fallen by 3.75%, reaching 47.38 euros. This significant drop in benz share price underscores the confluence of diesel emission issues, profit warnings, and broader industry headwinds that are currently impacting investor confidence in Daimler and the wider automotive sector.
