Rejuvenated Daimler beats expectations

Reuters

* Daimler Q3 adj EBIT 2.23 bln eur vs Rtrs poll 2.12 bln

* Mercedes Q3 EBIT margin 7.3 pct vs Rtrs poll 6.9 pct

* 2013 adj EBIT to fall 8 pct from last year's 8.13 bln eur

* Shares up 4.1 pct

By Christiaan Hetzner

FRANKFURT, Oct 24 (Reuters) - German automotive groupDaimler forecast higher fourth-quarter profit after arejuvenated model range and cost cuts in the core luxury carbusiness helped it to post better than expected results onThursday.

While earnings growth is being driven primarily by the newMercedes-branded cars that lift sales volumes and reduce harmfulprice discounts, the company is also improving profitabilitythrough the elimination of waste.

Finance chief Bodo Uebber said that the two-year programmeaimed at cutting a combined 3.1 billion euros ($4.3 billion) incosts at its luxury cars and commercial trucks divisions is onschedule and would provide it with a good start for next year.

"We anticipate further earnings improvements in the future,"the Daimler CFO said, adding that it has achieved 70 percent ofthe 600 million euros in savings planned for Mercedes this year,up from 30 percent at the end of the second quarter.

The company said it now expects fourth-quarter earningsbefore interest and tax (EBIT), excluding one-off items, will behigher than last year. From its latest full-year guidance, theimplied forecast for the last three months of 2013 is for profitup about 27 percent year on year to 2.2 billion euros.

Shares in Daimler were up 4.1 percent at 1340 GMT, making itthe top performer on Germany's blue chip DAX index andeasily beating its European auto peers.

"Reported earnings exceeded market expectations in everydivision," wrote LBBW analyst Frank Biller in a research note.

Third-quarter group EBIT excluding one-off items rose 15percent to 2.23 billion euros ($3.07 billion), beating anestimated 2.12 billion in a Reuters poll of 12 banks andbrokerages.

IMPROVING MARGIN

Daimler's Mercedes luxury car business expanded its EBITmargin, a benchmark for comparing profitability with rival BMW, by nearly a full percentage point to 7.3 percent,surpassing expectations of 6.9 percent.

Worried that the recent improvement is solely down toDaimler's product cycle, some analysts argued that it couldstruggle to close the gap on BMW and Volkswagen's Audi. BMW and Audi had margins of 9.8 percent and 10.5 percentrespectively in the first half, against 4.9 percent at Mercedes.

"There's no reason to think that Mercedes - after thiscatch-up phase with new models - can outgrow BMW and Audi,especially given brand, cost and productivity issues," wroteBernstein analyst Max Warburton after the results announcement.

The 14 percent gain in third-quarter car sales, the 420million euros in Mercedes cost cuts already achieved this yearand a stronger final three months would not be enough to offseta disastrous start to 2013, the company conceded.

Daimler reaffirmed that underlying profit would drop thisyear, but specified that the fall would be about 8 percent toaround 7.5 billion euros, in line with the Reuters poll.

Explosive growth in premium car sales in China has helpedMercedes, BMW and Audi to escape the worst of the misery intheir home European market, where demand has plunged to 20-yearlows.

By comparison, volume brands have been bleeding red ink inEurope and are now eyeing the upmarket segment as a solution totheir troubles. Ford, for example, plans to launch a new Vignalepremium sub-brand in early 2015.

However, the U.S. carmaker said on Thursday that itsEuropean woes have already begun to recede. The company postedbetter than expected third-quarter results, with its Europeanlosses narrowing to $228 million from nearly $470 million in thesame period last year.

NEW MODELS

While Mercedes remains more profitable than most volumecarmakers, its earnings strength has fallen short of both BMWand Audi because of internal problems including, until recently,a dearth of compact and high-end luxury models.

But Mercedes is finally starting to hit the sweet spot ofits model cycle after relaunching its A-Class compact late in2012 and unveiling the newest version of its flagship S-Classlimousine in July. Unlike consumer electronics companies,carmakers can only afford to revamp their products every sevenyears or so.

Mercedes is also adding all-new models to its range, such asthe CLA compact four-door coupe, which made its debut this year.That will be followed by next year's entry into the boomingcompact SUV segment with the GLA. Even its Smart brand is due tooverhaul its ForTwo microcar next year and launch a four-seaterbased on the Renault Twingo..

Daimler's progress has lifted its shares by more than 40percent this year, making it the third-best performer amongGerman blue-chip companies. The shares are now valued at 10.7times forward earnings, against a sector average of 9.1 percent,according to Thomson Reuters data.

Daimler is the first major European carmaker to publishquarterly profits. Results from Fiat as well asVolkswagen and its stable of brands are due on Oct. 30, with BMWis scheduled to report on Nov. 5.

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