Introduction, Daimler's moat and fundamental analysis
Daimler AG (NYSE: OTCPK:OTCPK:DDAIF) is an automotive manufacturer that produces passenger cars, trucks, vans and buses. It also offers financial services to its automotive businesses. The most famous products are the Mercedes-Benz cars which make 57.4% of sales. Currently the company is in an extensive expansion plan with plans of adding 10 new plug-in hybrid models by 2017 and working on autonomous driving cars for the long term. The plug-in hybrid models are a great combination that allows the company to grasp both the ecological trends in car manufacturing and keep the reliability of good old fashioned fossil fuel powered cars, thus avoiding range issues. You are probably already thinking that this is nothing new so let me introduce you to why I think DDAIF is a good investment story by introducing the Daimler moat. I think that when you are a car company that can say "We invented cars" you already have something no other company will ever have. On top of that tradition you can add the strong brand that Mercedes-Benz is as a risk lowering factor when buying a stock. Apart from the brand currently the stock trades with an 11.68 PE ratio, a price to sales ratio of 0.67 and a 3.04% dividend yield with 10% revenue growth for last year. Adding to that are new production highlights like the CLA Shooting brake, the GLE Coupe or the Mercedes-Maybach S 600 Pullman that already created unit sales growth of 11.3% in April and 12.8% in May on top of 13% unit sales growth in Q1 2015. The other side of the medal is that it is still a cyclical industry and any recession or trouble in Europe will have a strong effect on the company.
An international diversification play for US orientated investors
The official currency of Daimler is the euro and 33% of sales are from Western Europe whereas 25% are from the US. The fact that Daimler has only a small production in the US creates a hedge because a stronger US dollar makes the cars cheaper and thus increases sales while a stronger euro gives currency gains to the stock owner.
A dividend reinvestment plan for Daimler
I created a dividend reinvestment plan based on the assumption that EPS will increase at a 10% rate during the next 10 years. Currently earnings are increasing at a faster pace but to be conservative used the compound annual growth from 2007 till today (EPS 2007 = €3.8, current EPS = €7.39, CAGR = 10%). Including the second greatest financial crisis after the Great Depression seems like a pretty secure margin of safety. The company expects to pay out 40% of earnings as dividends and a new stock repurchase plan has been announced but that is conservatively already included in the 10% EPS growth rate. As for the dividend reinvestment I also used a 10% stock price increase per year. Trouble in Europe could lower the stock price and give cheaper buying opportunities whereas a higher stock price might induce selling and profit taking for the holder. In the following table the plan for an €100.000 investment that at these prices gives ownership of 1225 Daimler stocks. The dividend reinvestment plan can be seen in the below table (table 1.)
Table 1. Dividend reinvestment plan for Daimler with a 10% EPS growth
Source: Author's calculations
At the end of the 10th year the total investment should amount to €349.696 or an annual return of just above 13%.
A growing company with on one side a low PE ratio, a renovated design car line, strong history and lots of new technological developments and on the other side a cyclical business, uncertainties in Europe and the euro. Because of the tradition and global presence I would say that DDAIF is the least cyclical of automotive manufacturers and a great diversification play for US investors where a dividend reinvestment plan gives a nice international diversification play with a large margin of safety. After 10 years you should be able to enjoy the fruits of long term dividend reinvesting and treat yourself with a brand new Mercedes-Benz while still having a nice sum in your portfolio.
Disclosure: I am/we are long DDAIF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.