German luxury carmaker Daimler reported a surprise increase in first-quarter operating profit, helped by its financial services business that offers loans and leases to car buyers and is benefiting from low interest rates. The margin at Daimler's Mercedes brand, the metric most comparable with profitability at rivals BMW and Audi , slid about 90 basis points to 8.4 percent, results showed on Friday.
That was partly due to temporarily lower pricing in China as the company made way for new models of cars such as the normally lucrative S-Class.
By comparison, Volkswagen said on Wednesday that premium brand Audi's margin widened 80 basis points to 11.4 percent over the period. BMW reports its results next Thursday.
The fact that Daimler's profit was boosted from operations outside its core car manufacturing - including a contribution from its stake in aerospace group EADS - weighed on the stock, which underperformed European rivals.
A cash burn of nearly 21 million euros ($28 million) per day due to a seasonal increase in stocks of unsold vehicles also unsettled some investors.
"These are especially good conditions for financial services with low borrowing costs, low credit risk and high residual values (for cars coming off lease) so it is not really sustainable," WestLB analyst Adam Hull said. Financial services "is at a peak level, and the market tends not to value these profits with a particularly high multiple."
The picture is mixed for carmakers, with strong growth in the United States offset by a sluggish Europe, where austerity measures are dragging many economies into recession and depressing consumer confidence.
Growth in some Asian markets is slowing from previous high levels, but overall demand for premium cars like the Mercedes-Benz GLK sports utility vehicle are holding up better than the price-sensitive mass market models.
Daimler's stock fell 1.4 percent by 1339 GMT, lagging a 0.9 percent gain in the European automotive index, leaving the company worth about the same as BMW despite its much higher revenue base.
Mercedes sold about 20 percent more cars in China during the first quarter, but its local joint venture swung to a small loss. A spokesman said that was due to a production shutdown to retool the Beijing plant to build the GLK as a third model. For all of 2011, the jv had contributed 142 million euros to profits.
"Yes it was negative in the first quarter but I assume it will bounce back due to the ongoing production in Q2 and Q3 in China," finance chief Bodo Uebber told analysts during a conference call.
Roughly 60 percent of Mercedes cars sold in China last year were imported, including all high margin S-Classes, a level the group wants to bring down to about 33 percent in 2015, to avoid costly import duties. Group earnings before interest and tax (EBIT) rose 5 percent to 2.13 billion euros ($2.82 billion), better than the 5 percent drop to 1.93 billion estimated in a Reuters poll. Daimler said it still expected its ongoing operations to report EBIT at the same level as last year, when it earned 9.0 billion euros - guidance so far deemed credible by the market.
Daimler blamed a seasonal increase in stocks of unsold vehicles for having burned four times as much cash at its industrial operations than a year earlier, reducing its cash pile by 1.9 billion euros to 10.1 billion at the end of March. Uebber stuck to his guidance for a 2012 industrial free cash flow of more than 2.35 billion euros excluding one-off cash contributions such as the 250 million euros to its Engine Holding and Foton joint ventures in the first quarter.
"At first I twitched when I saw how high the cash burn was in the first quarter, but this kind of seasonal build-up in inventories is not unusual particularly when you're launching a lot of new models," said Gerhard Wolf, automotive corporate credit analyst at Stuttgart-based bank LBBW.
Debt markets were relatively relaxed about the inventory build-up, with spreads on credit default swaps, which widen when investors perceive a borrower to be less creditworthy, rising only a tick despite the high cash-burn rate.
"That's because underlying demand for cars like the Mercedes E-Class is healthy this year, unlike in 2009 when the premium car market was shrinking by over 20 percent and Daimler was desperately trying to move Mercedes off dealers' lots in order to drum up cash," Wolf added.
Daimler is adding at least 10 new models to its product range by 2015, including three compacts and three S-Class derivatives, such as a resurrected successor to the exclusive Pullman stretch limousine.
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