Daimler AG

daimler

Ticker: DDAIY, Buy below $80.

Why I Would Buy

  1. Cheap – Daimler trades at less than 9 times trailing earnings, 1.3 times book and below 0.5 times trailing sales!
  2. Generous R&D Spend – Daimler consistently spends between 4 to 5% of revenues on research and development. In 2015 this amounted to an astounding 6.5 billion Euros.
2011 2012 2013 2014 2015
5.3% 4.9% 4.7% 4.4% 4.4%
  1. Strong Returns on Equity –Daimler  has posted impressive RoE numbers:
2011 2012 2013 2014 2015
14.6% 17.4% 20.1% 16.4% 15.9%
  1. High Investment Grade Credit Ratings – Daimler enjoys strong credit ratings on its long-term debt (S&P: A-, Moody’s: A3, Fitch: A-).   
  2. Low Payout – Despite a dividend greater than 5%, the payout ratio is at about 40%.

What Could Go Wrong

  1. Poor Cash Flow – The company has surprisingly been negative free cash flow for the past 5 years. The poor cash flow generation is exemplified by it’s operating cash flow in 2015: it was a miniscule 222 million Euros earned on revenues of 149+ billion Euros!
  2. High Beta – Despite having a diversified product line (the ubiquitous Freightliner trucks for example are a part of Daimler’s offerings), a majority of profits are derived from its luxury car business. Luxury vehicle sales tend to suffer during economic downturns; for instance during the financial crisis in 2008 Daimler’s profits cratered and in 2009 it reported a loss.

Disclosure: I am long DDAIY, please read additional disclosures here before taking any action based on this post.

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