Daimler Roars Back to Life

By The Sizemore Letter

Back in March, I recommended that readers use the recent weakness in Daimler (DDAIF) shares to add to their positions.   American and Japanese automakers had enjoyed a fantastic first quarter while German automakers Daimler, BMW (BAMXY) and Volkswagen (VLKAY) had seriously underperformed.

The reason for the rough ride?

Investors had been punishing the German automakers for a handful of reasons:

1. They had the misfortune of being domiciled in Europe, which happened to be spooking the market at the time with Italian and Spanish political drama and the bungled Cyprus bailout.
2. They were distinctly not domiciled in Japan.  The drop in the value of the yen was seen as a boost to Japanese auto exporters at the expense of their German rivals.
3. The German luxury cars are the favorites of wealthy Chinese, and China had recently begun to crack down on extravagance by political figures.  (Giving a new Mercedes or Rolex watch to a public official was a good way to grease the wheels, so to speak).

I viewed each of these issues as temporary distractions that would run their course.  Europe has been “in crisis” and China has been “slowing” for the better part of three years now, and yet luxury auto sales have never been stronger.  And given the dynamics of the luxury market,   a weaker yen is not catastrophic for the German exporters.  If you can afford a $70,000 car, then you’re going to buy the car you want;  price competitiveness would matter much more to mass-market automakers like Volkswagen.

And even if I had been underestimating the macro risk, Daimler was already priced for zero growth.  At time of writing Daimler traded for 12 times earnings and yielded over 5% in dividends.  Roughly a third of the company’s market cap was in cash.  Barring an end-of-the-world apocalypse, it seemed to me that it would be difficult to lose money on an investment in Daimler over any decent time horizon.

What a difference a couple of months can make.  Daimler’s stock has come roaring back to life, and my recommendation has shot from 7^th place to 2^nd place in the InvestorPlace Best Stocks of 2013 contest with a year-to-date return of 20%, including dividends.

That’s all fine and good, but what about now?  Is Daimler still a buy?

Yes.  Even after the recent run-up in price, Daimler is far from expensive.  Based on 2013 estimates, it trades for just 10 times earnings 0.4 times sales.  It yields 4.6% in dividends, though I should warn you that the American ADR only pays a dividend once per year, in April, so don’t buy this stock for the dividend unless you’re willing to hold on to it for a while.

Meanwhile, Daimler’s profit outlook is looking up, and demand for the redesigned S-Class—its high-end flagship model—has been strong.

As investors continue to rotate out of defensive sectors and into more cyclical, economically sensitive sectors, automakers such as Daimler should continue to do well.   I’m expecting a strong finish to 2013.

If you don’t own shares of Daimler already, I recommend buying on any dips.

Disclosures: Sizemore Capital is long Daimler. This article first appeared on InvestorPlace.

SUBSCRIBE to Sizemore Insights via e-mail today.