Germany’s equity market has traditionally been resistant to pressures from activist investors. But recently the country’s big corporations are feeling some pressure to maximize stock prices. Some investors are suggesting that big German auto companies spin out their truck manufacturing businesses, which appear undervalued compared to pure-play competitors. Stephen Wilmot writes at The Wall Street Journal:
It is the classic conglomerate problem: Daimler Trucks, which dominates U.S. highways with the Freightliner brand, is trapped within the Daimler automotive empire. The fearsome challenges facing the group’s larger Mercedes-Benz car division—ranging from the end of the U.S. car boom to intensifying competition with Tesla and the autonomous-driving projects of others Silicon Valley companies—inevitably monopolize media and investor attention.
Daimler’s stock trades for seven times forward earnings, compared with 16 times for Volvo —maker of Mack trucks, among others—which sold its namesake luxury car brand in 1999. This is the widest valuation gap in at least a decade. Worries about car makers are only half the reason; investors are also increasingly optimistic about the prospects of truck makers. The U.S. truck market seems to be rebounding after a difficult 2016. Volvo shares have been on a tear this year, particularly since first-quarter results in April that revealed an 11% increase in orders.
Taxed and capitalized at group rates, the profits of Daimler Trucks give it a current equity value of roughly €10 billion (roughly $11.28 billion). That rises to €21 billion using Volvo’s earnings multiple. Volkswagen VLKAY -1.16% is another auto maker with truck gems, namely the Scania and MAN brands, hidden away. The company’s market value is €70 billion. Brokerage Evercore ISI calculates that spinning off the trucks business and other moves would, theoretically, almost double the valuation.
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