2023-03-28 08:17:28 ET
Summary
- Daimler Truck is the largest truck and bus manufacturer in the world in terms of revenue.
- Since it has only been recently spun off from Mercedes, it seems like the company is still ignored.
- After a full year as a standalone company, Daimler Truck seems to be catching up with Volvo Group and PACCAR in terms of profitability.
- It may be time to start building a position, taking advantage of a rather cheap valuation.
Introduction
Daimler Truck ( DTRUY , DTGHF ) has concluded its first full year as a publicly traded company after the spin-off from Mercedes .
So far, I have kept a neutral stance on the company because I wanted to see if its management could deliver solid results. I may be a little too cautious, but I prefer to lose the first move and see whether a company that has been spun off can really sail on its own, compared to taking a risky bet and find myself disappointed with its course. In the case of Daimler Truck, it was clear to me that, among the three European players that have recently been spun-off (Traton ( TRATF ) from Volkswagen and Iveco Group from CNH Industrial), it was the most suited to become a true market leader both in terms of product quality and financial results. In this article, I will explain why I am upgrading it to a buy, putting it in the same group with Volvo Group ( VLVLY ) ( VOLAF ) and PACCAR ( PCAR ).
Daimler Truck FY 2022 Results
A premise before we go over the last report: when I look at the manufacturing industry, I go through the results to look for two main indicators of financial strength: EBIT margin and industrial free cash flow. For now, let's keep this in mind. We will get back to this point in a moment.
Let's look now at the main financial highlights. In light blue, we see 2021 results, while in grey we see those belonging to FY 2022.
First of all, with a revenue of €51 billion ($54.5 billion), the company is the largest truck and buses manufacturer, with Volvo Group in second place at €42 billion ($45.4 billion) and Traton in third place with a revenue of €40 billion ($43.2 billion). North American PACCAR, which is usually more known, is the fourth manufacturer by revenue size with $28.9 billion. EBIT increased by 4%, however, if adjusted for restructuring measures and M&A transactions which affected in particular Mercedes-Benz (the European branch of the company) then we have a 55% increase YoY, which is quite an achievement. Though I am not fond of adjusted results, we must consider that Daimler Truck is still facing some one-off costs related to the recent spin-off.
This led to an adj. return on sales (calculated as adj. EBIT on revenue) of 7.7%, a significant step up from the 6.1% achieved in 2021. In particular, it is a very good result in a year where supply chain bottlenecks and inflationary pressure did lead some industrial companies to higher EBIT in absolute value, but lower return on sales as a percentage of total revenues.
In addition, we also see a free cash flow of the industrial business of €1,746 million, which is one of the metrics I like the most because it shows if a capital-intensive business is truly able to generate excess cash.
Thanks to this strong performance, the company is going to pay a dividend of €1.30 per share, sticking to its announced dividend policy of paying approximately 40% of consolidated net profits. With EPS at the end of 2022 at €3.24, the proposed dividend keeps the promise.
So far, great results. But what is in the pipeline? This graph shows very clearly how incoming orders are still quite high and close to Q4 2021 levels. This sets Daimler Truck for a solid year where, thanks to a more manageable supply chain, margins should actually keep on expanding.
An Ignored Leadership
I still think many people don't realize how strong this company is in terms of market share in higher margins markets. Daimler Truck, thanks to its brands Freightliner and Western Star, is the market leader in North America with 40% of Class 8 trucks. Mercedes-Benz, the European division, has a 20% of the heavy-duty truck market. These are big chunks of the most profitable pies in the world.
In particular, I consider strategic its leading position in North America. In fact, as I have pointed out in an article on PACCAR, in the U.S. I see particularly favorable tailwinds for trucks. Here the national highway system together with interstate roads is more than four times larger with 440,480 miles against the 92,282 miles of the railroad network. In addition, about 75% of public sector funding goes to highways and streets, as we can see from the graph below.
Not only, but trucking, according to the U.S. Department of Transportation , contributed the largest amount of all the freight modes to GDP with $359.5 billion. In fact, trucks carry the largest shares by value, tons and ton-miles for shipments moved less than 1,000 miles, while rail only takes the lead in the range between 1,000 and 2,000 miles. Since 82.9% of the value of goods moved in the U.S. travel a distance under 1,000 miles, the bull-case for trucks is set.
Aside from the U.S., where I expect the company to keep its leading position and benefit from strong public spending, Asia should offer some thrust to future sales. We can see below how Daimler Truck is well diversified through three main geographies, with Asia being its third-largest market. If we consider how Asia has been slowed down by the zero-Covid policy of China, we know there is more room to go for the company, as this market recovers.
One more source of data, before we draw some conclusions. This is one of my favorite slides in Daimler Truck presentations, and I always go look for it. It enables me to have a quick glimpse of the margin trajectory for every division of the company.
In the first column, we see the overall results which are trending upwards. Then we see the breakdown by divisions. We see that Trucks North America still has not recovered from its pre-pandemic margins. On the other hand, Mercedes-Benz impressively improved its profitability, moving from a 0.4% return on sales to 8.1% in just three years. Trucks Asia is still an anomaly, but we can expect margins in the high single digits. Daimler Buses, understandably, has not recovered from the pandemic as bus orders were halted for almost two full years due to many uncertainties regarding travel and tourism.
What does this situation tell me? Daimler Truck is improving, but it still has room to increase its profitability. For example, due to restrictive order slotting to defend its margins, Mercedes-Benz didn't open Q4 2023 order books in December as usual.
Furthermore, two years ago, Daimler Truck has signed an agreement with Cummins to outsource the production of medium duty engines . In this way, Daimler freed up funds to focus on zero-emission technologies. I already pointed out in another article how Daimler Truck must be considered one of the main players in electric truck manufacturing. For example, in 2022, it released its Class 8 Freightliner eCascadia ; the year before, Mercedes-Benz released it eActros .
Valuation and Conclusion
Here is my revised valuation through a discounted cash flow model. Even though I project an FCF growth rate of only 3% for the next five years, we are still before an undervaluation of around 30%.
As I said, I expect Daimler Truck to improve its margins due to favorable macro-trends and key markets that can easily improve.
This is why, after a full year has gone by since the spin-off, I upgrade my rating to a buy, believing one of the reasons why Daimler Truck is still cheap is because it is still not very well known or actually ignored because of more popular players. Chances that we will soon see three major players with double-digit margins are high, and I expect Daimler will soon join Volvo Group and PACCAR in terms of profitability. To be fair and more transparent, I will personally initiate a small position right after this article is published, in order to allow everyone to share the starting point with me and see how this investment performs.
For further details see:
Daimler Truck: Ignore No More The Industry Leader (Rating Upgrade)