October 20, 2017 / 7:34 AM / a year ago

Breakingviews - Daimler’s reform drive lacks horsepower

A man sits in an electric automobile by carmaker Daimler before a annual shareholder meeting in Berlin, April 13, 2011. REUTERS/Thomas Peter (GERMANY - Tags: BUSINESS SPORT MOTOR RACING) - BM2E74D0Y1701

LONDON (Reuters Breakingviews) - If Daimler’s cars were as slow as its restructuring, the company would have few customers. The Mercedes-Benz parent has problems aplenty, which bumper third-quarter sales do little to change. A plan to carve out its car and truck units might help lift its valuation if that eventually led to a separate listing. But at the current pace of progress, investors have no reason to give the company much credit.

Friday’s third-quarter results were a reminder of the rocky ride that Daimler faces in the short term. One-off costs such as diesel-emissions fixes meant third-quarter operating profit fell by 14 percent from a year earlier to 3.5 billion euros. That was despite record sales of almost 600,000 Mercedes-Benz and smart automobiles. But the real challenges for auto groups like the Mercedes maker are far bigger and include a margin-sapping shift to electric vehicles and potentially declining car ownership from the growth of ride-hailing apps.

There’s no fighting these trends, but Daimler could do shareholders a favour by spinning off its trucks and buses arms, which merit a higher valuation than the conglomerate’s lowly multiple of 7.7 times forward earnings. First, the division faces less fierce competition than the cars business. Second, online shopping has created a boom in logistics and delivery vehicles. Daimler trucks and buses together brought in more than 37 billion euros of revenue last year, but barely show up in the German group’s share price because of a huge conglomerate discount. Spinning them off could boost the group’s value by more than 30 billion euros, Evercore ISI analysts estimate.

Daimler’s management is alert to the threats facing the industry, and has proposed sensible restructuring ideas to adapt to a changing world. For example, the company on Monday announced its plan to split into three parts – trucks and buses, cars and vans, and financial services. But neither separate listings nor divestments are currently part of management’s public plans. Even the intermediate step of legally separating the three bits will be voted on in 2019 at the earliest. A more meaningful restructuring is too far away to make much difference to Daimler’s valuation right now.


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