Why I Am Long Daimler Truck (OTCMKTS:DTGHF)

Introduction

The truck manufacturing business has undergone some modifications in recent times, as three principal gamers have been spun-off from different conglomerates centered on car manufacturing. Subsequently, up till these spin-offs, traders may put money into truck producers solely by buying both Volvo Group (OTCPK:VLVLY, OTCPK:VOLAF) or PACCAR (PCAR). Now, there are three extra gamers which might be publicly traded: Traton (OTCPK:TRATF, OTCPK:TRATY), Iveco Group (OTCPK:IVCGF) and Daimler Truck (OTCPK:DTRUY, OTCPK:DTGHF).

The rationale for these spin-offs is sort of clear. Whereas being half of a bigger conglomerate, these three corporations weren’t as worthwhile as the opposite two gamers. Whereas the latter reported stable outcomes with double-digit margins, the previous was once barely worthwhile.

Since they’ve been despatched to face on their very own, these corporations have to execute their enterprise in a greater manner. I saved on monitoring the progress of the three, and after a yr, I noticed that Daimler Truck is on its manner to go away behind the opposite two gamers and meet up with the main two. Because of this I lately initiated a small place within the firm that {couples} my funding in Volvo Group. There’s, in reality, sufficient proof to indicate our economies cannot do and not using a rising use of trucking. On this atmosphere, Daimler Truck is an business chief, particularly in North America, that has but to be detected by many traders’ radars and search instruments.

On this article, I wish to undergo the latest earnings report to grasp if the corporate retains on being on monitor or not.

Q1 Earnings Report

Daimler Truck launched its earnings report for the previous quarter and disclosed these principal info:

• unit gross sales in comparison with prior-year’s quarter elevated by 15% to 125,172 items (Q1 2022: 109,286).
• as a consequence, income rose by 25% to €13.2 billion (Q1 2022: €10.6 billion).
• unsurprisingly, adj. EBIT elevated by 78% to €1,162 million within the reporting interval (Q1 2022: €651 million).
• internet revenue got here in at €795 million (Q1 2022: €275 million).
• industrial free money circulation was up 129% YoY to €168 million (Q1 2022: €73 million). This had an affect on
• return on gross sales (margin) reached 8.8% (Q1 2022: 5.9%)

To assist us visualize these knowledge, we are able to use the slide Daimler Truck confirmed throughout its earnings presentation. In mild blue we have now the outcomes of the identical quarter in 2022, in gray we see this previous quarter’s outcomes.

General, we’re earlier than a development displaying a rising and increasing firm. To assist who’s studying, let me give a bit rationalization about one knowledge: industrial FCF. Often, corporations similar to Daimler have a seasonality the place they construct up stock within the first quarter(s) of the yr. This results in poor, if not unfavorable FCF. The very fact Daimler Truck greater than doubled its FCF this quarter reveals how its operations have gotten as soon as once more clean with much less provide chain hiccups.

With the ability to generate optimistic money circulation, the corporate is initiating an annual dividend paying 40% of the corporate’s internet revenue. This yr, on July 21, the corporate will thus pay a dividend of €1.3 per share. It is a 4.4% yield, however bear in mind the German withholding tax on dividends is round 26%.

Now, these outcomes have been broadly anticipated for 2 causes. To begin with, many equipment manufacturing are releasing outcomes which have simple comparables. I imagine Deere (DE), although in one other business, defined the scenario in a transparent manner: in Q1 2022, resulting from provide chain disruptions, many producers have been, on one aspect, growing their inventories due to unfinished supplies (thus damaging the general free money circulation), on the opposite, the automobiles that have been being shipped have been bought with 2021 costs. Because of this the primary half of 2023 will see, typically talking, multiple of those corporations with blow-out outcomes.

Because of this, these manufacturing corporations are certainly now harvesting the outcomes many different corporations achieved final yr on the peak of the post-Covid restoration.

Subsequently, since investing makes use of previous outcomes to forecast what may come subsequent, we have to ponder two elements:

1. In a positive atmosphere, is Daimler Truck performing in step with its friends or is it outperforming them when it comes to monetary outcomes?
2. How is Daimler Truck order e book doing?

Daimler Truck is enhancing its profitability

To reply the primary query we have now assistance from two totally different knowledge that we are able to examine. To begin with, we all know Daimler Truck declared that its spin-off was aimed toward attaining double-digit margins.

As a matter of truth, we all know from the report how worthwhile every section of the corporate is. We see how Vans North America is already properly above 10% when it comes to margins. Mercedes-Benz, which covers Europe, is getting nearer to this threshold, although it’s not there but. The 2 smaller segments are enhancing, too, with Asia greater than doubling its margins and buses turning into worthwhile as soon as once more after the pandemic.

Certainly, among the many three corporations lately spun-off, Daimler Truck has been extra worthwhile than its two different friends Traton and Iveco for the reason that starting. Nonetheless, we have to acknowledge that Traton’s current quarterly report was forward of expectations and introduced the corporate to a 8.4% return on gross sales that comes near Daimler Truck’s 8.8%. Nonetheless, Traton remains to be largely depending on Scania (1Q income of €4.17 billion with 13.3% RoS), whereas Navistar, its North-American model remains to be a lagger (€2.74 billion in income and 6.3% RoS) in comparison with Daimler Truck’s North-American section the place Freightliner and Western Star making up collectively € 5.8 billion in income for the quarter with a 33% market share within the heavy-duty truck section.

To assist us visualize how Daimler Truck appears to be racing at a quick pace to affix the 2 main corporations within the business, we are able to use this graph taken from a direct competitor, Paccar. Right here we see how, for the reason that pandemic, Daimler Truck has been capable of go away Traton and Iveco behind, whereas catching up with Paccar and Volvo.

The pace Daimler Truck confirmed in its execution is among the info that made me provoke a place within the inventory, forecasting we’ll see that firm obtain its double-digit objective over the subsequent two years.

Earnings orders

We now have already seen how sturdy gross sales have been to be anticipated. However the query is: can these ranges be sustainable? To reply we have to understand how order consumption is performing. Daimler Truck is sort of clear when talking of this metric and it permits us to watch quarter after quarter the book-to-bill ratio.

In mild blue, we see incoming orders in gray unit gross sales. We see how North America orders decreased sharply by virtually 50% QoQ but when we zoom out and take a look at the identical quarter previously yr, the decline is a bit over 10%. That is acceptable, contemplating how 2022 was an distinctive yr when it comes to demand for equipment normally. Mercedes-Benz appears to be recovering QoQ, despite the fact that it’s properly beneath its Q1 2022 highs. Nonetheless, Vans Asia and Daimler Buses are nonetheless on restoration mode and partially offset the order consumption decline within the Western world. This reveals a well-diversified firm.

Nonetheless, we’d like additionally to think about one facet which isn’t proven by these numbers. Final yr, seeing sturdy inflationary strain, many producers, beginning with Volvo Group, determined to limit their order books as a way to hold them beneath management when it comes to price administration and margin safety. Daimler Truck did this, too. Actually, over the last earnings name we heard its administration state that

“Demand for vans in each of our Industrial segments remained on a really sturdy stage because the pent-up demand in all our key areas continues to be excessive. That is clearly seen within the demand and gross sales of our merchandise in addition to in our nonetheless excessive order backlog.

In our key areas, we’re kind of bought out for this yr. Whereas the availability chain definitely has improved in comparison with final yr, we nonetheless have challenges and we nonetheless anticipate some extra periodic provider shortages affecting manufacturing. Nonetheless, we’re changing our growing unit gross sales into sturdy financials.”

In different phrases, despite the fact that we see demand a bit down this yr, it’s nonetheless excessive sufficient to have the corporate already booked for the rest of the yr. I’ve been saying for a lot of months that this case might lead many cyclical corporations similar to Daimler Truck to reside the expected-to-come gentle recession in a singular manner. Whereas this gentle financial pullback ought to happen, these corporations might be centered on fulfilling their orders and shortening their lead time. In the meantime, a recession of a few quarters might go by with out these corporations virtually noticing it. As demand picks up once more, they might be prepared to satisfy it with out the availability chain disruptions we noticed final yr.

As well as, Daimler Truck appears to be studying Paccar’s lesson. The latter, in reality, is well-known as a pacesetter when it comes to monetizing its truck base by after-sale service and spare components gross sales. Daimler Truck simply introduced it can do one thing related in Europe, too, with Mercedes-Benz Vans establishing central logistics hub for the worldwide provide of spare components. A brand new hub, in reality, might be in-built Halberstadt, Saxony-Anhalt and it ought to be capable of ship, as defined through the earnings name, “as much as 300,000 totally different gadgets to virtually 3,000 car sellers in over 170 nations all over the world”.

Conclusion

Given these outcomes, I nonetheless see it affordable for an organization whose development in profitability is prone to begin buying and selling at a bit increased multiples. In my previous protection, I ran my discounted money circulation mannequin and gave a goal worth of €39. Given the latest outcomes and a forecast that sees the corporate attaining a margin round 9%, the corporate remains to be buying and selling round 51% decrease than the sector common. Contemplating the corporate is catching up with Paccar and Volvo, it may very well be anticipated to commerce at a better fwd PE in comparison with the present 7 it’s being given by traders. Daimler Truck is anticipated to do round €55 billion in income this yr. With a internet revenue margin of 9% we’re speaking a few internet earnings of virtually €5 billion. Divided by present market cap of €23.7 billion we’re speaking a few fwd PE beneath 5, which I take into account low, contemplating the multiples Paccar and Volvo are buying and selling at. Subsequently, I hold my purchase score and my goal worth of no less than €39 per share, which equals to a attainable 34% upside.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. change. Please concentrate on the dangers related to these shares.