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FOR INVESTORS, DAIMLER-CHRYSLER COULD BE A HIGH-OCTANE COMBO (int'l edition)
When James Stratton purchased shares of Chrysler (C) for the Stratton Growth Fund (STRGX) 18 months ago, he was drawn by the scrappy No. 3 U.S. auto maker's low price relative to its strong sales. Now that Chrysler's stock is about 60% higher and the company is being acquired by German industrial giant Daimler-Benz AG (DAI), this value manager is holding on.
Soon to be the world's fifth-largest maker of cars and trucks, DaimlerChrysler is poised to usher in a new era of globalization for auto sales. With strengths in different segments of the auto market and different parts of the world, the two companies are considered a good fit: Mainstreet USA meets luxury German engineering. "Our inclination is to take the new stock and hold it," says Stratton.
Ken Shapiro, who bought Daimler-Benz for clients of his Martinsville, N.J., investment advisory firm Condor Capital, has reached the same conclusion. He thinks Daimler's top-flight Mercedes brand name and superior engineering can make Chrysler only stronger. Most important, he thinks management has the smarts to implement the merger without cheapening the Mercedes brand. For investors, he says, "I don't think it makes sense not to do the exchange."
Shareholders in both Chrysler and Daimler need to decide over the next week whether to participate in the merger or sell their shares. The new DaimlerChrysler (DCX, when issued) shares are expected to begin trading on both the New York Stock Exchange and in Frankfurt on Nov. 16. Chrysler stockholders will receive 0.6235 a share in the combined company for each Chrysler share they own. About 60% of earnings in the new company will be from the Chrysler side.
'FAIRLY CHEAP.' The combined company will have a strong balance sheet, low debt, and a pile of cash, according to Standard & Poor's equity research. Chrysler's operating performance has been strong: It reported on Nov. 3 that its October U.S. sales rose 20%, compared to October, 1997. Daimler-Benz also reported strong October sales from its Mercedes-Benz division in North America.
As far as valuation goes, analysts expect the stock to have a forward p-e of 11, which is high for Chrysler, but very low for Daimler-Benz, says David Healy, an auto analyst with Burnham Securities. "My inclination is that Chrysler is fairly cheap right now," he says.
Indeed, near-term pricing pressure is providing new investors a buying opportunity. As a German company, DaimlerChrysler was kicked off the S&P 500 Index. Merrill Lynch analyst Nicholas Lobaccaro wrote in an Oct. 28 report that he expects index funds to unload 74 million shares of Chrysler, equal to 4.7% of the combined company, before Nov. 16. According to his analysis, stocks taken out of the S&P 500 fall by an average of 6.23% up to the deletion date, but over the following week, they recover 2.91%.
"Once the merger is closed, that selling pressure will be gone," says Healy, although he concedes there may be some tax selling until the end of the year as well. He believes the stock will be trading higher early next year than it is now.
FEWER AGING AUTOS? Wall Street, however, is concerned about what lies beyond the next few months for the auto industry. Auto stocks were punished in late summer and early fall because of fears of a global slowdown. Now that those fears have abated, the stocks have recovered somewhat. But analysts remain concerned that consumer appetites for new cars could still stall because so many have already replaced their aging autos.
Lobaccaro believes that some future demand has been brought forward into this fall because new cars are so affordable and interest rates are so low. Although he thinks sales will stay north of the 15-million-vehicle rate for the next several months, "It would be unreasonable, in our view, not to expect a payback in early 1999," he wrote in an October report on the auto industry.
Healy thinks that a global economic collapse "seems less and less likely," however. And Stratton is still waiting for real evidence of a slowdown. He bought Chrysler at 32 in May of 1997 when Wall Street was concerned that it couldn't maintain such a strong sales pace. He says he will closely watch consumer spending and income levels in the U.S. and Europe. "If we saw consumer confidence collapsing or consumer incomes declining, we would be more cautious on all the autos," says Stratton. His fund has 4.1% of assets in Chrysler and 3% in Ford (F).
Meantime, Shapiro expects the new company to weather the cyclical swings of the auto sector. "This merger puts DaimlerChrysler in a long-term position to benefit" from globalization, he says. "In the short run there are question marks. But we don't buy stocks for the short run."
By Amey Stone in New York
Updated Nov. 5, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.