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European Automakers Shift Up A Gear

Mercedes

Image source: Buzz Photos / Shutterstock.com

What's going on?

German automaker Daimler, owner of Mercedes-Benz, said it made much more money than expected in the first half of 2016 – and that helped boost stocks of pretty much all European auto companies 3-6% higher on Tuesday.

What does this mean?

Luxury cars might be what it’s best known for, but Daimler also makes a lot of its profit from producing big trucks and vans. In fact, its vans division did particularly well in the past 6 months. But Daimler’s stronger-than-expected results were driven primarily by its Mercedes luxury cars division, where sales growth was almost double that of rivals Audi and BMW. Importantly, Daimler did not downgrade its expectations for its full-year profit (as some investors thought it would).

Why should I care?

For the stocks: It’s been a tough year for European auto companies – but perhaps it won’t end up as badly as feared. The generally weak economy hasn’t helped and, amongst other things, the possibility that other European carmakers may also have cheated on emissions (as Volkswagen did) has kept investors up at night. But Daimler’s news suggests that the overall environment isn’t as bad as feared – which is probably why the whole sector saw their stock prices go up (even Peugeot, which reported some disappointing sales figures on Tuesday, saw its stock pop 6%).

The bigger picture: Daimler’s €400 million of mystery legal fees are worth keeping an eye on. Amongst its results, Daimler set aside €400 million for legal costs – but wouldn’t disclose exactly what those costs are for. They could relate to an ongoing US lawsuit alleging some of its cars violated clean-air standards. Another possibility is that it relates to a German government probe into dodgy steel purchases by carmakers. Whatever it is, the size of the legal bill raised eyebrows and suggests there is certainly some legal risk to Daimler specifically and, perhaps, to others in the sector.

Originally posted as part of the Finimize daily email.

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