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UPDATE 2-Rejuvenated Daimler beats expectations

Christiaan Hetzner
Thursday, 24 Oct 2013 | 5:59 AM ET

* 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 vs last year's 8.13 bln eur

* Shares up 3.2 pct

FRANKFURT, Oct 24 (Reuters) - German automotive group Daimler lifted its fourth-quarter profit forecast after a rejuvenated model range and cost-cuts in the core luxury car business helped it to post better than expected results on Thursday.

While earnings growth is being driven primarily by the new Mercedes-branded cars that lift sales volumes and reduce harmful price discounts, the company is also improving profitability through the elimination of waste.

Finance chief Bodo Uebber said that the two-year programme aimed at cutting a combined 3.1 billion euros ($4.3 billion) in costs at its luxury cars and commercial trucks divisions is on schedule 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 of the 600 million euros in savings planned for Mercedes this year, up from 30 percent at the end of the second quarter.

Shares in Daimler rose 3.2 percent in early trading, putting them among the top performers on Germany's blue chip DAX index and beating its European auto peers.

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

Third-quarter group earnings before interest and tax (EBIT) and excluding one-off items rose 15 percent to 2.23 billion euros ($3.07 billion), beating an estimated 2.12 billion in a Reuters poll of 12 banks and brokerages.

IMPROVING MARGIN

Daimler's Mercedes luxury car business expanded its EBIT margin, 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 to Daimler's product cycle, some analysts argued that it could struggle to close the gap on BMW and Volkswagen's Audi. BMW and Audi had margins of 9.8 percent and 10.5 percent respectively in the first half, against 4.9 percent at Mercedes.

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

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

Daimler reaffirmed that underlying profit would drop this year, indicating a fall of about 8 percent to around 7.5 billion euros, in line with the Reuters poll.

Explosive growth in premium car sales in China has helped Mercedes, BMW and Audi to escape the worst of the misery in their home European market, where demand has plunged to 20-year lows.

By comparison, volume brands such as Ford are bleeding red ink in Europe and are now eyeing the upmarket segment as a solution to their troubles. U.S. carmaker Ford, which plans to launch a new Vignale premium sub-brand, will give an update on its 2013 forecast for a $1.8 billion pretax loss in Europe when it publishes quarterly results later on Thursday.

NEW MODELS

While Mercedes remains more profitable than most volume carmakers, its earnings strength has fallen short of both BMW and 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 of its model cycle after relaunching its A-Class compact late in 2012 and unveiling the newest version of its flagship S-Class limousine in July. Unlike consumer electronics companies, carmakers can only afford to revamp their products every seven years or so.

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

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

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

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