How to Invest in the Hidden Value of Big Trucks -- Heard on the Street
If the world's largest truck maker was valued in line with its closest peer, it would be worth roughly twice as much. There is increasingly reason to think a value-unlocking spinoff could come to fruition.
It is the classic conglomerate problem: Daimler Trucks, which dominates U.S. highways with the Freightliner brand, is trapped within the Daimler automotive empire. The fearsome challenges facing the group's larger Mercedes-Benz car division--ranging from the end of the U.S. car boom to intensifying competition with Tesla and the autonomous-driving projects of others Silicon Valley companies--inevitably monopolize media and investor attention.
Daimler stock trades for seven times forward earnings, compared with 16 times for Volvo--maker of Mack trucks, among others--which sold its namesake luxury car brand in 1999. This is the widest valuation gap in at least a decade. Worries about car makers are only half the reason; investors are also increasingly optimistic about the prospects of truck makers. The U.S. truck market seems to be rebounding after a difficult 2016. Volvo shares have been on a tear this year, particularly since first-quarter results in April that revealed an 11% increase in orders.
Taxed and capitalized at group rates, the profits of Daimler Trucks give it a current equity value of roughly EUR10 billion (roughly $11.28 billion). That rises to EUR21 billion using Volvo's earnings multiple. Volkswagen is another auto maker with truck gems, namely the Scania and MAN brands, hidden away. The company's market value is EUR70 billion. Brokerage Evercore ISI calculates that spinning off the trucks business and other moves would, theoretically, almost double the valuation.
This kind of analysis hasn't historically played well on Germany's notoriously conservative corporate scene. Executives and powerful labor unions alike have embraced scale and shunned investor-friendly measures to boost stock prices.
But there are tantalizing signs of change in Germany Inc. Ownership of the country's stock market has globalized. Activist investor Cevian Capital has won a board seat at steel giant Thyssenkrupp. Most revealingly, Joe Kaeser, boss of German engineering titan Siemens, has advocated once unheard-of maneuvers, such as a partial spinoff of minority stakes in the company's health care unit and possibly even its core factory-automation business. "We definitely won't be the world's last conglomerate, turning off the lights," he said in February.
It is also increasingly hard for automotive executives to ignore Sergio Marchionne's break-up success at Fiat Chrysler. Ferrari's stock has almost doubled since being spun out of the embattled parent group last year. It is now valued as a luxury-goods brand like Hermès rather than a car maker.
Evercore ISI puts the chances of a truck spinoff within 12 to 18 months at 30% for Daimler and more than 50% for Volkswagen, where pressure on management is more intense. The potential for change within Germany's automotive industry shouldn't be overstated, but it is greater than investors may assume.
Write to Stephen Wilmot at email@example.com
(END) Dow Jones Newswires
June 05, 2017 10:30 ET (14:30 GMT)