(MENAFN- Khaleej Times)I made no secret of my conviction that European auto makers were stellar strategic buys since late-2013 as long as UAE-based investors hedged the euro risk implicit in this strategy. Readers of this column know I outlined a strategic case to the euro at 1.3650 last summer this strategic trade recommendation was hugely profitable for all those who acted on it.
Daimler has fallen from its ?100 highs to ?82 now thanks to Greece China and the angst on global growth. I believe the DAX swoon has given us a strategic reentry point into Daimler. (Our last strategy trade generated 50 per cent upside from ?60 to ?90). Why? One second-quarter earnings were fabulous especially the earnings beat in Mercedes Benz and the rise in trucks with North America truck orders on a roll. Two German car sales were up seven per cent in July a metric that matches the better IFO and credit growth data. The Tectonic Fatherland is showing economic momentum that is hugely Mercedes Benz positive. Three BMW is hugely exposed to China's luxury sedan market (a no-no or nein-nein given the Politburo crackdown!) but China was the Achilles heel of Daimler Benz. This is now an advantage and I would be tempted to implement a Daimler/BMW pair trade. Four Daimler's fabulous free cash flow generation and shareholder value focus makes a forward dividend yield of five per cent with no real risk of a cut (can Shell or BP claim this?) irresistible to me. This is Daimler dear friends not some shlock manufacturer in Bongo Bongo land. Five Daimler now trades at a forward enterprise value/Ebitda of four low even for a consumer cyclical global brand. The current valuation at 9.2 times earnings will only compress as earnings momentum/revision is just so strong. This is all the more true since the ?5 billion fall in under funded pensions since mid-2014 is pure ballast for the investor. Six since I anticipate Mario Draghi will expand his "shock and awe" quantitative easing this autumn I expect the euro to get slammed well below parity. The analogy is the fall in the yen from 105 to 120 after Kuroda-san's increased the Bank of Japan's JGB buying programme last October. This euro call is a currency tailwind. Seven I have learnt the hard way to accumulate Daimler on the eve of every major Mercedes product launch. The GLE Coupe and the E-Class are the obvious catalyst here. Eight Daimler's restructuring programme is definitely working. I track only one metric: return on invested capital has moved up 25 per cent since mid-2013. Daimler shares has historically correlated well with this metric even if only after a one year lag. There are several factors that could cause a major 10-15 per cent selloff in Daimler shares. China could end up as another Lehman in a world where Dodd Frank/Volcker Rule/Basel III makes liquidity shocks and 20 per cent a global equities hit inevitable. The German Greens are a potent political force no auto maker can ignore. Yes it is possible that Daimler falls to say ?72; if and when that happens expect another rhapsodic column on this subject! I got General Motors totally wrong. In essence the Street slammed the shares due to the all too real risk of a China profit collapse and the dealer incentives on trucks did not exactly help. The shares are inexpensive but hostage to macro Armageddon in the Middle Kingdom. While I believe Ford still had downside risk at 15 Ford has less exposure in China but is exposed to a broader recession in Asia that is now all too credible as even current account surplus currencies as diverse as the won Taiwan dollar Thai baht and ringgit collapse. While the second-quarter results at Ford were great and the F-150 rollout is an obvious catalyst I am still paranoid about downside risk as I am convinced Wall Street is overvalued and due for major sell off if the King Dollar trend guts corporate margins. I await a 13 handle on Ford to get bullish on Dearborn again. MACRO IDEAS
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