Daimler Truck (OTCPK:DTRUY), the world’s largest truck and bus manufacturer, has only been a publicly traded company for 3 years. Since spinning off from Mercedes, the company has set out to close the gap with industry leaders. and achieve a double-digit operating margin. The 2023 financial year ended and Daimler Truck’s return on sales was 9.9%, up 220 basis points year-on-year. Unit sales reached 526,000 units and revenue was 55.9 billion euros. Margin growth was stable from 2021 to 2023 and should continue to meet the 2030 target of 12%.
The company is the European leader in medium and heavy-duty trucks and the number one in North America in Class 6-8 trucks, thanks to its two brands Freightliner and Western Star. This market is the largest for Daimler Truck and also the most profitable with a RoS of 12.3%.
Given the increasing tonnage of trucks in the United States, truck manufacturers are not expected to run out of business any time soon.
Although core markets such as North America and Europe have seen some slowdown recently, growth of 10% is still expected between 2025 and 2030. India is expected to witness 70% growth by 2030.
Daimler Truck is also involved in the field of autonomous solutions and is planning to enter the market in 2027.
Thanks to its improved profitability, Daimler Truck has already initiated a dividend and buyback policy. The expected dividend payout is between 40 and 60 percent of net profit and will be supported by a buyback program of up to 2 billion euros. By July 2024, 0.9 billion euros have already been implemented, meaning that over 50 percent of the program will be completed by August 2025.
The company’s balance sheet receives solid ratings: A- from S&P Global and A3 from Moody’s.
One of its main goals through 2030 is to expand its services, following the example of its main competitors such as PACCAR (PCAR) and Volvo Group (OTCPK:VLVLY). The former in particular generates over 20% of its revenue from services. Daimler Truck is still relatively new as a standalone company and still has plenty of room to adapt its operations to the best standards in the industry. Therefore, we can expect more room for margin expansion compared to its two most profitable competitors. The goal is to increase service revenue by 50% from 2025 to 2030, with 60% of that coming from service contracts and spare parts.
However, we should also be aware of what is currently happening in the market after the post-pandemic hustle and bustle.
Simply put, demand is normalizing. The overall book-to-bill ratio is below 100%. To be more precise, the group reported 83%, meaning that for every 100 vehicles sold, only 83 new orders are received. Only Trucks Asia has a book-to-bill ratio above 100%, at 117%. However, sales in Asia have been rather sluggish in recent years, so a small uptick in the north is enough to have a better ratio. Trucks North America, on the other hand, reported 61%, meaning that the market is declining quickly. Since this is Daimler Truck’s most profitable market, we should expect the sales mix of the next few quarters to drag Daimler Truck’s margins down.
In the second quarter of 2024, revenues fell 4% year-on-year to EUR 13.3 billion. The company’s EBIT was severely affected, falling 22% to EUR 1.08 billion. The FCF of the industrial business was negative by EUR 285 million, compared to positive EUR 382 million in the previous year.
The year-on-year EBIT comparison shows the negative impact of volume and pricing mix, with Mercedes-Benz and Trucks Asia dragging the company’s RoS down the most. North America, on the other hand, continued to show its pricing power. However, given the sharp decline in orders, I do not expect this to continue for long.
Positive news came from Daimler Buses, a company that is usually very low margin. Things are recovering well here, and for tour operators and similar companies, the pandemic seems to be far behind us. Orders are picking up and the company can benefit from net pricing, leading to a big jump from a RoS of -1.2% in Q2 2022 to a positive RoS of 9.1% in Q2 2024.
Daimler Truck cannot protect itself from a weaker market and, like its competitors, had to report a downward revision of its 2024 forecast. Sales will be below €55 billion and the company’s EBIT will record a “significant decline”. This means a decline of less than 15% according to the company’s definition. Sales are expected to be below 480,000 units, while the previous forecast had 490,000 units as the lower limit. The RoS is then expected to be between 8% and 9.5%, with an FCF of around €2.8 billion.
The stock is currently trading at €34.3 in Frankfurt, €13.3 below its 52W high of €47.6. The company’s FWD P/E is 9 and its P/S ratio is 0.5.
This shows one thing: investors don’t value Daimler Truck’s revenues very highly due to their volatility and low visibility on margins and earnings. Paccar and Volvo are all above 1. This is due to their revenue mix, which is supported by a strong service business. So if Daimler Truck successfully expands its services, its revenues could double or close the gap, leaving plenty of room for upside.
The same goes for earnings. Both Volvo and Paccar trade at a P/E ratio of over 12. This means that Daimler Truck can increase its multiple by at least 33% to get close to the trading range of its competitors.
What does this lead to?
Daimler Truck is not a short-term bet. The upcoming reports will bring lower results and the stock could suffer a bit. But Daimler Truck can be a very reasonable bet for a turnaround. Part of that has already been achieved, which makes us believe the company can execute thoroughly to position itself as one of the two profitability leaders.
Currently, I am not willing to rate the stock as a buy due to poor market conditions and expectations, but would keep it on my watchlist for 2025.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these securities.