Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

How Daimler Is Preparing Itself For Strong Position In Auto Industry

|Includes: Daimler AG (DDAIF)
Summary

Daimler is investing in R&D and Capex to address the changing auto industry

At the risk of having investors unexcited about its dividends, it chooses to maintain the dividends at the same level.

As Daimler's fundamentals are strong and has steady growth, it is rated as a "buy".

Daimler is investing in R&D

Daimler is in a position of strength to invest in future technology. Daimler AG's Mercedes brand has reinvented itself as a forward-looking luxury-automotive brand by transforming its current generation of models. In 2012, the A-class was introduced which was unrecognizable from the previous version. This evolved into an iconic brand attracting younger generations. The process strengthened the balance sheet and allowed for investment in electrified vehicles, autonomous driving and connectivity.

Daimler is expanding R&D and Capex to Address Rapidly Changing Autos

Since 2008, Daimler's R&D expense has more than doubled, amidst an expanding Mercedes range and electrification and emission legislation for cars and trucks. Daimler announced a 6.6% increase in R&D in 2017-2018, continuing this upward trend for R&D. Capital spending also rose 20% higher to 7.1 billion euros. When combined with R&D, the capital spending and R&D amount to almost 10% of revenue. Compared, VW has the highest R&D budget of any company globally, with a 2016 R&D ratio-to-sales of 6.4% Daimler's 5%. BMW ranks third among European automaker's R&D spending and may exceed its target 5-5.5% corridor again in 2017. Tesla's R&D ratio was 17.7%.

Daimler's new corporate strategy lies in shared services in response to rising importance of services

Services are becoming increasingly important in the auto industry. Automakers have greater responsibility to take on mobility provider service role alongside their role as manufacturers.

Due to the Higher Investments, Free Cash Flow only covers the Dividends

Daimler's flat 2016 dividend of Euro3.25 failed to excite investors. FCF of 3.9 billion euros in 2016 produced a 1.1x dividend coverage, and a similar level is anticipated in 2017 despite R&D and capex headwinds guided 13% higher to 15.2 billion euros.

Daimler China Profitability Remains a Key Driver of its Earnings

High-margin exports to China were a key driver of earnings for German automakers. In 2016, sales surged again, though margins are normalizing. Mercedes' China car sales rose 17% in 2016 as its largest single market, accounting for 22% of sales. About 36% of these sales are imports which are consolidated.

Overall Investor Takeaway

Sacrificing to excite investors with their dividends, Daimler is choosing to invest highly in capital expenditures and R&D in preparation for the changing auto industry and technological disruptions. Overall, analysts are rating Daimler with a Strong Buy with 15 analysts recommending buy and only 2 analysts recommending sell. Daimler's price is consistently rising over long term as its fundamentals are strong.

Disclosure: I am/we are long DDAIF.