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Date: 5/6/2018

Daimler AG (XETRA: DAI)


€ 66.48

Data Overview Summary


Target Price €74.67
 The company’s efficiency and restructuring programme positioned it in a favorable
Potential Upside/Downside 12%
position for the future.
52 Week High-Low $195.32 - $144.42
 Its model portfolio is more diverse than ever before including cars, trucks, vans,
Beta (5-year monthly) 1.43
busses and the financial services segment addressing new target groups.
Market Capitalization €71.12B
 The company is expecting to sell more units than it did in FY17 mainly because the
Dividend Yield 5.50%
world economy is expected to keep performing well.
Industry Auto & Truck Manuf.
 The main drivers of growth are Europe and China, albeit recovery in demand in the
Current Ratio 1.23x
emerging markets should continue.
Debt/Capital 66.0%
 The company’s fundamentals are healthy and have improved throughout when
EBITDA Margin 12.5%
compared to the previous fiscal year.
Price/Earnings (LTM) 7.05
 The sustainable high dividend yield of 5.5% provides shareholder’s with a steady
Price/Book (P/B) 1.09
stream of income.
Price/Cash Flow (TTM) 4.57
Earnings Yield 14%

Net Debt/Equity 1.76 Abbreviated Financials


Value Score : C Income Statement (MIL) FY0 FY-1
Revenue 164,330 153,261
P/E rel to industry C Gross Income 34,424 32,090
P/B rel to industry B EBITDA 20,016 19,070
EBIT 14,327 13,579
P/E/G Ratio to Industry B
Pretax Income 14,301 12,574
P/S rel to industry B Net Income 10,525 8,526
P/CF rel to industry C Common Shares 1,070 1,070

EV/EBITDA rel to industry E Balance Sheet (MIL) FY0 FY-1


Piotroski F-Score 6 Cash & ST Investments 24,747 22,813
Growth Score : B Fixed Assets 75,055 73,323
Total Assets 255,345 242,988
Proj. EPS Growth (𝐹1/𝐹0 ) -3.9% Current Liabilities 87,624 84,457
Hist. EPS Growth (𝐹0 /𝐹−1) 23.6% LT Debt 78,378 70,398
Total Liabilities 191,476 185,038
CFO Growth (𝐹0 /𝐹−1) < -100% Total Shareholders’ Equity 63,869 57,950
CFO Growth (𝐹0 /𝐹−2) > 100%
Return on Equity (ROE) 17.5% Cash Flow Statement (MIL) FY0 FY-1
Net Income 14,301 12,574
Dividend Growth (𝐹0 /𝐹−1) 12.3% Funds From Operations 18,017 16,942
EBITDA Growth (𝐹0/𝐹−1) 6.1% Cash From Operations -1,652 3,711
Capital Expenditures -10,158 -8,833
Momentum Score : C
Cash From Investments -9,518 -14,666
Last Earnings Surprise C Cash Dividends Paid -3,477 -3,477
Earnings Momentum D Cash From Financing 13,129 12,009

Operating Margin Growth B


Sales Growth C Consensus Recommendation Author

Analyst Earnings Revision C ██████████████████ Glen Borg
Growth Momentum C Sell Strong Buy Equity Research Analyst
# of Analysts: 31 Contact Number: +356 99747380
Value Momentum A Upgrades Last 30 Days: 4 Email: glen.borg.gir@gmail.com
Downgrades Last 30 Days: 8 LinkedIn: linkedin.com/in/glenborg/

1
Company Overview

Daimler AG (“Daimler”, “the firm”, “the company”) is an automotive manufacturing company. The Company is engaged
in the development, production and distribution of cars, trucks and vans worldwide. The company’s reported revenue in
2017 of €164.330 million, an increase of 7.22% when compared to the previous year. Daimler's segments include
Mercedes-Benz Cars, Daimler Trucks, Mercedes-Benz Vans, Daimler Buses and Daimler Financial Services. Each segment
reported positive revenue growth – Daimler financial services grew most by 15.08% followed by Daimler Trucks which
grew by 7.6% over the previous year. The Mercedes-Benz Cars, the Daimler Buses and the Mercedes-Benz Vans saw
revenue growth of 6.06%, 4.19% and 2.56% respectively. The revenue growth was mainly driven by the increase in car
sales by 9.2% to nearly 3.3 million vehicles. The Mercedes-Benz Cars segment includes vehicles of the Mercedes-Benz
brand, including the brands, Mercedes-AMG and Mercedes-Maybach, as well as the Mercedes me brand. The Daimler
Trucks segment develops and produces vehicles under the brands, including Mercedes-Benz, Freightliner, Western Star,
FUSO and Bharat Benz. The Mercedes-Benz Vans segment is a supplier of a range of vans and associated services. The
Daimler Buses segment sells completely built-up buses under brand names, including Mercedes-Benz and Setra. The
Daimler Financial Services segment supports the sales of its automotive brands in approximately 40 countries around the
world.

Reasons to Buy

I. The ability to adapt and compete in a dynamic industry. The company has proven its capability to heavily invest
to strategically position itself for the future while simultaneously maintaining a large dividend to its shareholders.
This is only possible due to its ability to generate free cash flow. The group went through a phase of restructuring
and future profitability performance should further reflect this. By 2022, the company is expecting to deliver ten
fully electric models ranging from smart to SUV. The company also supports established selected startups to
work on different projects to drive its innovations factor.

II. The growth opportunities in Asian markets. The group delivered an increase in revenue of 9% over the previous
year in the Asian market segment reflecting the rise in demand for high quality cars as individuals in these regions
are becoming wealthier. The company is also performing extremely well in South Korean and Indian markets as
coveted premium vehicles are increasing in popularity. In order to optimize efficiency in these regions, the
company has started producing vehicles through its plant in Beijing - to date, more than one million vehicles have
been produced

III. The brand. The well-known high quality brand allows the company to generate operating margins in excess of
the industry average. In their latest report, Brand Finance has named Mercedes-Benz as the world’s most
valuable automotive brand. They estimated the brand value to $43.9 billion.

IV. Large portfolio. The company provides vehicles for every market. It embedded a strategy to target consumers
and providing them with the same high quality standard vehicle according to the purpose required by the
consumer. This way, the company diversified itself from solely producing premium cars. Having said that,
Mercedes Benz-Cars still account to approximately 72% of total sales. Additionally the Financial Services segment
provides added value through contribution in its core business areas by financing, leasing and insuring its
customers. About half of all the vehicles delivered by Daimler around the world today are either financed or
leased by Daimler Financial Services. By 2017, financial services segment grew by a CAGR of 8.26% over the past
5 years and accounted to approximately 14% of total revenue in FY2017.

V. High dividend. Dividend payed out stood at €3,906 million or €3.65 per share, a 12.3% increase over the previous
year. The company has managed to issue a consistent rising dividend each year going back to 2002 - with the
exception of 2010 because of consequences of the financial crisis. The company’s dividend policy aims to
distribute approximately 40% of the net profit attributable to Daimler Shareholders. The dividend coverage ratio
stand at healthy levels and as such we expect the distribution of dividends to remain as is.
2
Reasons to Sell

I. Intense competition in the industry. Although the company posted healthy revenue growth over the previous
year, average revenue per unit sold in each segment (except for financial services) gradually declined. The largest
decline was reported in Mercedes-Benz Vans segment of -8.2%. This implies that the company was able to sell
more cars, however, at a lower price than the previous year. The cause of this may be attributed to the tight
competition in the automotive industry.

II. Weak competitive advantage. Daimler various brands, predominantly the mercedes-benz entangle a degree of
competitive advantage. Nevertheless, we believe this competitve advantage is not durable and will most likely
not be sustainable in the long run and shall reflect into the companies operating margins.

III. Rising Interest rates. Interest rates are expected to gradually increase over the short and medium term as
economic growth is robust around the globe. As more cars are being sold on credit, rising interest rates will
increase the cost of borrowing and consequently decentivize the purchase of vehicles on loans. The low interest
rate scenario is in fact the key reason why new car sales in recent years have hit record levels. The increase in
interest rates shall reflect in the growth of units sold of the company.

IV. Downturn in economy. A Slowndown in global economy, particularly in China could potentially have a significant
impact on the companies growth drivers. The enormous debt accumulated since the financial crisis, especially in
the corporate sector, represent a significant risk. If the government restricts credit growth, it would lead to a
more significant growth slowdown than currently expected, this would result in a perceptible cooling-off for the
world economy. Within China, a slowdown could result in an excessive increase in credit defaults, which would
then lead to turbulence in the banking sector and the financial markets. In particular for the Mercedes-Benz Cars
division, for which China is now the biggest individual sales market by a large margin, the aforementioned risks
could result in significant negative effects on its unit sales.

Ratio Analysis
Profitability Ratios Industry Average FY2016 FY2017 % Change
Gross Margin (Gross Profit/ Revenue) 17.7% 20.9% 20.9% 0.2%
EBITDA Margin (EBITDA/ Revenue) 9.6% 11.8% 12.5% 6.1%
Operating Margin (EBIT/ Revenue) 6.3% 8.2% 9.1% 10.2%
Net Margin (Net Income/ Revenue) 5.3% 5.7% 6.6% 15.3%
Return on Assets (Net Income/ Average Assets) 5.4% 3.8% 4.4% 14.1%
Return on Equity (Net Income/ Average Equity) 14.6% 15.4% 17.5% 13.1%
Asset Turnover Ratio (Revenue/ Total Assets) 0.71x 0.67x 0.66x -1.0%

Liquidity Ratios Industry Average FY2016 FY2017 % Change


1.03x 1.21x 1.23x 1.4%
Current Ratio (Current Assets/ Current Liabilities)
0.83x 0.91x 0.93x 2.5%
Quick Ratio ((Current Assets – Inventories )/ Current Liabilities)
0.33x 0.13x 0.14x 6.6%
Cash Ratio (Cash & Cash Equivalents/ Current Liabilities)
- 149x 149x 0.0%
Defensive Interval Ratio ((Cash + Receivables)/Daily Cash Expense)

Solvency Ratios Industry Average FY2016 FY2017 % Change


48.7% 66.6% 66.0% -0.8%
Gearing Ratio (Total Debt/ (Total Debt + Total Equity))
2.1x 5.9x 5.6x -5.4%
Net Debt to EBITDA (Net Debt/ EBITDA)
31.7% 48.4% 49.6% 2.5%
Debt to Asset Ratio (Total Debt/ Total Assets)
3.9x 4.1x 3.9x -4.8%
Financial Leverage Ratio (Total Assets/ Total Equity)
44.8X 33.1x 35.4x 6.7%
Interest Coverage Ratio (EBITDA/ Interest Expense)

3
Efficiency Ratios Industry Average FY2016 FY2017 % Change
Inventory Turnover Ratio (Cost of Sales/ Average Inventories) 5.7x 4.8x 5.1x 5.9%
Days of inventory on hand (DOH) 63.7x 76.4x 72.1x -5.6%
Receivables Turnover Ratio (Revenue/ Average Receivables) 6.1x 3.2x 3.2x 0.7%
Days of sales outstanding (DSO) 76.3x 114.9x 114.1x -0.7%
Payables Turnover Ratio (Cost of Sales/ Average Trade Payables) 6.45x 10.5x 10.4x -0.7%
Number of days of payables 56.6x 34.8x 35.0x 0.6%
Working Capital to Sales Growth (Working Capital/ Revenue Growth) 0.5% 2.2% 0.7% -68.2%

Valuation Hypothesis

Our model price is €74.67, 14% more than the current price of €65.3 (as of 2 May 2018). The model price is calculated using
a 10 year Discounted Cash Flow approach with a weighted average cost of capital (WACC) of 4.41% and a conservative
terminal growth rate of the Free Cash Flow to the Firm of 1%. The WACC reflects the current financial structure of €70.09
billion in market value of equity and €126.85 billion in market value of debt. The cost of debt used is 0.60% based on the
estimated company default spread and the cost of equity is 11.31% which reflects the global risk premium.

Revenue

We expect revenue growth to be between the 3% - 9% level (Higher weighting is given to lower values) and gradually declines
over time. This is based on the expectations for the company to keep performing well – increase number of units sold
geographically - in the next couple of years, however, due to the intense competition – observed from the fall in revenue
per unit sold in all segments – revenue growth is expected to deteriorate. The strong economic performance globally,
benefited the company’s revenue growth the past 6 years (Average stood around 7.5%). Due to the cyclicality of the business,
the expectations of a slowdown in developed economies (majority of revenue) in the short and medium term, average
revenue growth is likely to be less.

Operating Margins

In 2017, operating margins stood nearly the past six year average at 9.1%. We also expect operating margins to gradually
decline over time with a high likelihood to reach the industry average of 6.5%. We believe the company’s competitive
advantage is not robust and will deteriorate as a result of intense competition in the automobile industry.

Tax Rate

We use an effective tax rate of 24%.

Equity Valuation Distribution

The below distribution in figure 1 shows the substance of our buy recommendation. We run a Monte Carlo Simulation with
25000 iterations to generate possible future scenarios according to our base assumptions mentioned previously. The current
quoted price lies slightly below the 20 percentile. This implies that the intrinsic value has an approximately 20% chance of
being under the current price of €65.5 given the range of possibilities used in our assumptions. Consequently, it has an 80%
chance of being above the current market value, giving us a satisfactory amount of confidence to set a buy recommendation
on the stock.

4
Figure 1: Distribution of estimated value per share

5
Disclosures

The analysts contributing to this report do not hold any shares of this stock. The revenue and stock price forecasts are the
Gorilla’s Investment Research (GIR) consensus estimates. Additionally, the analysts contributing to this report certify that the
views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. GIR certifies
that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation
or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available
upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to
accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice
designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This
report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. GIR may
have a position long or short in the securities mentioned and buy or sell the securities from time to time. GIR uses the
following rating system for the securities it covers which results from a proprietary quantitative model using trends in
earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 24
months. The model assigns each stock a rank from 1 through 5. GIR Rank 1 = Strong Buy. GIR Rank 2 = Buy. GIR Rank 3 =
Hold. GIR Rank 4 = Sell. GIR Rank 5 = Strong Sell.