Daimler Surprises With Return to Profit

Posted by: Jack Ewing on October 19

After a series of tough quarters, carmaker Daimler (DAI) has managed to cut costs enough to return to profitability. The Stuttgart-based company’s shares soared Oct. 19 after it reported an operating profit of $703 million in the third quarter.

Though profit was down 39% from a year earlier, the third-quarter earnings were a massive improvement compared to what investors have seen so far in 2009. In the second quarter of 2009 Daimler reported an operating loss of $1.5 billion, which came after a first-quarter loss of $2.1 billion.

The better-than-expected earnings overshadowed signs that sales are still weak. Revenue in the most recent period was flat compared to the previous quarter at about $29 billion. The return to profit was the result of cost cutting. Daimler is on track to exceed its goal of cutting costs by $6 billion, CEO Dieter Zetsche told German business magazine Wirtschaftswoche.

The mere fact that Daimler didn’t suffer another catastrophic sales decline seemed to be enough for investors. They focused instead on the improvement in profitability, as Daimler shares rose 7%. “Despite the continuing weakness in demand, Daimler managed to return to profit sooner than we expected,” Marc-Rene Tonn, senior analyst at bank M.M. Warburg, said in a note to investors.

Almost all of the third-quarter earnings boost came from the car and finance divisions, while the truck unit, which includes the Freightliner brand, continued to suffer losses. Daimler, which will release more detailed earnings Oct. 27, didn't give sales figures by division. But the company said Oct. 7 that September was its best month for car sales so far in 2009. The September performance could be a sign that demand for cars is stabilizing even after government incentives have expired.

The good news on earnings comes as Daimler is in the midst of realigning its lineup to offer more fuel efficient vehicles. On Oct. 16 Daimler broke ground on a new factory in Hungary that will produce updated versions of the A- and B-Class compact cars beginning in 2012. Especially in the European market, Daimler needs to strengthen its lineup of smaller cars to keep pace with high-end compacts offered by rivals BMW and Audi. In addition, Daimler said on Oct. 8 it will begin mass-producing a battery-powered version of its two-seat Smart car at an existing factory in Hambach, France. The electric Smart will go on sale in 2012.