The auto industry is a truly wretched business to be in. You have high labor costs and the constant threat of labor unrest. You have vicious competition among existing competitors. And perhaps worst of all, you have enormous capital expenditures in a highly cyclical business that is prone to booms and busts.
So, you might be surprised to see that Daimler AG (PINK:DDAIF) — the maker of the iconic Mercedes-Benz — is my recommendation for the InvestorPlace Best Stocks of 2013 contest.
Normally, I hate the auto sector and would refuse to touch an auto stock. But Daimler may be one of the best opportunities in the world at its current price. As a cyclical auto stock — and one based in crisis-racked Europe, no less — Daimler has gotten no love from investors in recent years.
But their timidity is our opportunity.
Whenever I think of Daimler’s flagship brand Mercedes, I will always think of the “Indiana Jones of Finance,” Jim Rogers. In a road trip across six continents chronicled in his book Adventure Capitalist, a customized Mercedes was Rogers’ vehicle of choice. Why? Because “every dictator and mafioso in the world drives a Mercedes … even in countries with no roads to speak of.” Rogers knew that if he had car trouble anywhere in the world, he would be able to find a mechanic who could work on a Mercedes.
Rogers wasn’t joking. Mercedes is the premier global luxury automobile. And it’s a fantastic way to get backdoor exposure to emerging markets, which I expect to enjoy a nice rebound in 2013.
Daimler gets well over a third of its sales from emerging markets, with China being a major contributor. China is already the world’s largest consumer of the high-end S-Class, and China accounted for 10% of Daimler’s revenues in the first three quarters of 2012 — and this despite a marked slowdown in the Chinese economy.
And Mercedes cars are by no means Daimler’s only product; Daimler is also a world leader in industrial trucks, which make up more than a quarter of revenues. And as you might expect, emerging markets are a major source of demand. Approximately half of Daimler truck sales come from Asia and Latin America.
China appeared to hit bottom in late 2012, and I expect a rebound in Chinese demand to benefit high-end luxury firms in general and high-end autos in particular. Even in a “bad” year (if you can call 7.5% GDP growth in 2012 “bad”), China was a major contributor to Daimler’s success.
Investors fret that 34% of Daimler’s revenues come from Western Europe, where unemployment is high and overall consumer demand is weak. But I’m not worried. Daimler’s high-income customers are less at risk of financial distress than the average European, and sales have remained stable throughout the crisis.
But let’s say I’m being too optimistic about the eurozone and that the atmosphere of austerity makes a large delayed dent in European sales in 2013. Even so, the stock price offers more than a sufficient margin of safety. The shares trade for less than 8 times earnings and yield dividends north of 5%.
Yet none of this tells the full story about how cheap this company is. Daimler trades at accounting book value and for just 0.39 times sales. It also has €46 billion in cash short-term investments, and receivables — and a market cap of just €44 billion. Yes, the cash in the bank and receivables are actually worth more than the entire company at current prices.
Daimler is simply too cheap to pass up. This is the maker of the premier global luxury car trading at prices that would suggest the Mayan calendar was correct about the world ending in 2012.
Daimler could easily double in the next 12-18 months. And if we’re a little early in getting into this stock, we’re getting paid handsomely to ride out any unexpected volatility.
At the time of publication, Sizemore was long DDAIF. Sizemore won the inaugural Best Stocks competition in 2011 and placed second in last year’s contest, falling short of the repeat by one percentage point.