Daimler Gears Up for Future
Daimler AG (DAI) is benefiting from aggressive efficiency improvement measures, cost reduction efforts and new model launches. The company is likely to benefit from its focus on the emerging markets. Strong earnings give the stock a positive spin.
However, the company is facing many challenges, including exchange rate fluctuations, weak auto pricing, rising raw material costs, rising R&D expenditure for compliance with CO2 emission reductions as well as a slowing US economy. Hence, we rate it a Hold with a six-month target price of $73.00.
On June 17, the Board of Management of Daimler AG decided to carry out a new share buyback program. The Board allowed for the buyback of approximately 96.4 million of the outstanding shares.
Daimler AG is currently benefiting from an extensive cost reduction program. The company plans headcount reduction and cutting down on consolidation of general & administrative (G&A) costs by $1.8 billion per year.
On the sales front, the Mercedes Car Group intends to achieve a return on sales of 10% by the end of 2010. In 2008, the company plans to launch eight updated models. The company plans to invest about $1.24 billion for another new plant in Hungary to expand its range of Mercedes-Benz compact cars. Daimler will also invest $930 million in its Rastatt, Germany plant to manufacture a new generation of compact cars. Growth in the segment is expected to be 6%, with 5% coming from the C-class series.
The company expects lower demand for passenger cars in North America and Western Europe for 2008. Revenues from Western Europe are expected to remain flat, with a marginal increase in Japan.
Shares of CSX Corp. Overbought
We are maintaining our Sell rating on CSX Corporation (CSX) due to valuation. We believe the shares have been overbought and that CSX is expensive on a fundamental basis.
CSX will report second quarter results on July 15. We are retaining our 2008 EPS estimate at $3.55, near the top of CSX guidance of $3.40-3.60, as well as our 2009 estimate at $4.00. Improved efficiency, strong yields, and share buybacks should offset weakening volumes from a slowing economy and higher fuel costs.
CSX reported a strong first quarter, with EPS before nonrecurring items up 60% year over year to $0.80, largely due to better-than-expected revenue growth. Results of the June 25 board election will be announced on July 25, though two activist funds claim they've won four seats on the board of directors. CSX just increased the dividend 22%.
CSX has planned to expand in two key corridors: the Southeastern corridor and the I-90 corridor. Over the next year, CSX will complete around 60 projects. A key driver for CSX's future performance will be the degree to which ONE PLAN succeeds.
