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Daimler -- solid long-term cash flow [ClearOnMoney]
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Daimler -- solid long-term cash flow

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Investment

Daimler -- solid long-term cash flow

26 Sep 2012 by Jim Fickett.

I would like to own more assets in countries where inflation is viewed as a dangerous scourge. Germany is at or near the top of that list. While I do not think one can predict how the euro zone sovereign debt crisis will work out, I'm quite sure that the ultimate solution will not involve high inflation in Germany. Germans mostly save by putting money in the bank, so currency stability is of prime importance to a large fraction of the population and, further, the great hyperinflation of the 1920's is remembered vividly and often referred to in current dialogue.

Daimler is a large, old company best known for their largest division, Mercedes-Benz cars. If you've spent much time in Europe you will have noticed that they also manufacture a large fraction of the commercial vehicles there – buses, trucks, and vans. More recently they're also into green, making, for example, the Smart car and hybrid versions of many of their other vehicles. No one is going to break in on the territory of the Mercedes name any time soon; with the much-bemoaned inequality of incomes in the world today, luxury cars will continue to see solid demand; and well-made trucks will always find a market. So Daimler is worth a look.

Growth

For many basic valuation questions it is important to know whether a company is growing. The data are somewhat ambiguous for Daimler; the company is either stable or growing gradually.

(All data are from the annual reports. All euro amounts are inflation adjusted and reported here in 2011 euros.)

The core business is in Mercedes-Benz cars. The recent impressive growth in sales is mainly because of Daimler's expansion into China – sales were up 39% from 2010 to 2011 in China, compared to sales down 2% in Western Europe. Daimler is banking heavily on China, expanding operations there and projecting continuing growth. I am somewhat less optimistic about China's growth but, even so, the car business is at least stable over the long term, and probably growing via emerging markets.

Revenue has clearly dropped, over the whole period shown. However this is, to a large extent, due to the disposition of Chrysler (after the disposition in 2007, results back to 2005 were retroactively restated for Daimler without Chrysler).

Shareholder equity has been flat.

With my skepticism about continued supercharged growth in emerging markets, I view Daimler as a stable, mature company with modest growth prospects.

Income

The first thing one notices about income, free cash flow, and the dividend, is the strong cyclicality:

A 10-year average is probably long enough to get past the high variation. Adjusting for inflation, the ratio of the current market capitalization to the 10-year average income is 13.3, which is a reasonable P/E. The 10-year average free cash flow gives a yield of 8.1%, which is very good for a mature manufacturer. The 10-year average dividend gives a yield of 3.6%.

Conclusion

The large cash flow yield suggests the dividend yield is sustainable. So Daimler looks to me like a bond with a reasonable, fairly safe yield and a somewhat volatile, inflation-protected principal – hence a decent place to preserve capital.

One remaining hesitation I have is that I prefer to invest in companies where I can admire the management. The fact that the free cash flow yield is much higher than the dividend yield, and yet shareholder equity is not growing, is somewhat worrying. I would like to know where all the cash is going, and whether it is really contributing to the future value of the company. Tracking this down may or may not be straightforward – the company is complex, with many subsidiaries and joint ventures all over the world.

After looking into the cash flow issue and recent quarterly results, I will probably wait a bit and see if things deteriorate further in Europe (quite likely and soon), China (quite possible) and the US (likely but with uncertain timing). Further economic bad news would probably give a more attractive entry point.