By Geoffrey Smith
Investing.com -- The last hurrah of summer or the start of a sustained turnaround?
Daimler (OTC:DDAIF), the maker of Mercedes-Benz vehicles, returned to profit in style in the third quarter, according to preliminary results released Friday, as the world economy reopened after the coronavirus-driven lockdowns of spring.
The company sold more of its products, sweated its assets harder and squeezed costs, to generate over 5.1 billion euros in free cash flow from its industrial operations. The market had expected less than 3 billion. The recovery was impressively broad: the cars, vans and truck divisions all posted healthy profits before interest and taxes.
In addition, the company drew a thumping 1.2 billion euro dividend from its Chinese operations.
To cap it all, the company said it expects the positive momentum to carry on into the fourth quarter, after seeing a particularly strong September. Detailed guidance for the year, however, will have to wait until the group publishes its audited results next Friday.
Daimler (DE:DAIGn) is unlikely to be the last European carmaker to make such an announcement: the results come on a day when European auto registrations posted their first year-on-year gain in 2020, in another sign that the worst of the pandemic has probably passed. The STOXX 600 Autos & Parts index rose 2.1% in response.
But while that’s optically pleasing, anything less would have represented something little short of disaster at the industry, given that lockdowns squeezed almost all of the second quarter’s sales into the three months between July and September.
Daimler said it “has seen a faster than expected market recovery and a particularly strong September performance.”
However, its forecast of continued growth in the fourth quarter was qualified by the assumption that there are no fresh lockdowns across Europe. That’s still very much in the balance.
Although the accelerating spread of Covid-19 will dent consumer and business confidence, there are good reasons for optimism: two weeks into the fourth quarter, car dealerships haven’t yet been affected by the tightening of restrictions on gatherings across most of the continent, which have fallen squarely on the hospitality industry; moreover, politicians are determined to avoid shutting down factories again, and the companies have used the summer to hone safe working practices.
One can quibble about Daimler’s sales mix – its announcement earlier this month that it’s accelerating the transition to electric vehicles merely acknowledges that it’s still behind the curve in that regard.
But the evidence of solid cash generation - at a level that Tesla (NASDAQ:TSLA), with seven times Daimler's market cap, can only dream of - vindicates the stock’s bounce from oversold levels in March: it’s now more than doubled since then, and it rose 3.7% on Friday’s numbers to test its highest level since January (although it failed to make a new post-pandemic high). It still remains cheap on a historical perspective at barely 11 times trailing earnings.