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Daimler Outlines Restructuring Plans to Offset Cost Woes

Zacks Equity Research

Daimler AG DDAIF has been navigating through rough waters for a while now amid regulatory challenges, high research & development costs, and scandal-related expenses. Shares of the company have scaled down 2.6% over the past year against the broader industry’s 11.4% rally. Headwinds from climate goals, weak global vehicle sales and the costly switch to greener vehicles hit the company hard. Amid changing dynamics of the auto industry, the German carmaker recently announced a cost-reduction plan to revive profit margins.

Counter Measures to Ease Hurdles

The cost burden to achieve European Union’s (“EU”) stricter emissions target and the race to roll out electric vehicles (EVs) are likely to dent the company’s earnings in 2020 and 2021. Daimler is aggressively focusing on cutting emissions across its fleet to comply with the EU emission standards, which will come into effect from 2020. Notably, Daimler could face a penalty of billions of euros from Brussels, in the event of non-compliance with the emission standards.

In view of the increasing costs, the company has outlined restructuring measures to maintain financial health. While Daimler invested massively in the recent years to develop electric and driverless cars, it is time to freeze the capex now. Daimler intends capex and research & development costs to be capped at 2019 levels, and reduced in the medium term. It aims to cut jobs of more than 1,000 managers, which is likely to slash costs by about 1 billion euros by the end of 2022. Putting a rein on spending and cutting jobs will aid the company in saving more than 1.3 billion euros.

Notably, it has rolled back the autonomous taxi plan and will emphasize on self-driving trucks instead. While the company was set to roll out 10,000 driverless cars on the street by 2021, it has now put the idea on the back burner. Amid its cost-containment efforts, the company has decided not to commit to a capital-intensive project. Ensuring the safety of self-driving cars is a major task, especially after Uber Technologies’ UBER infamous self-driving car crash in 2018.

No Quick Fix in Sight

Daimler is already bleeding cash. It invested more than 500 million euros this year in electric cars. The luxury carmaker has been hit by expensive recalls and has agreed to pay a fine of 870 million euros for violating diesel emission regulations. The expensive shift toward EVs amid legacy diesel issues and trade disputes is ailing the makers of Mercedes-Benz vehicles.

After the Mercedes car division cut the profit forecast to the range of 3-5% for this year, Daimler projected return on sales (RoS) of 4% and 6% in 2020 and 2022, respectively. For 2019, the company expects both groupwide EBIT and industrial cash flow to be lower than 2018 levels. Markedly, investors should be prepared for dividend cut, if the firm remains focused on disciplined capital allocation strategy.

Ola Kallenius, the chairman of Daimler, warned that the firm’s earnings would remain under pressure for the next two years. Uncertainty regarding Brexit and U.S.-Sino trade tiff is expected to clip profits in the near future. It is to be seen if the impact of cost and capex reduction will be able to push up RoS in the coming years.

Final Thoughts

While the company will be grappling with various challenges over the next couple of years, its restructuring efforts and the roll out of the next-generation electric and driverless cars will enable it to emerge stronger in the long term. The Zacks Rank #3 firm is trying to keep up with Volkswagen VWAGY, which is one of the largest players in the electrification space. Further, with the recent announcement of Tesla’s TSLA plans to enter into the German market by developing its Gigafactory in Berlin, Daimler should buckle up and get its foot in the door. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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