It was a busy Thursday for DaimlerChrysler (NYSE: DCX) as it released its second-quarter results and announced a significant change in management. First, the results. Operating profit came in at $2 billion, which was down from $2.5 billion last year, but well ahead of estimates. Net income increased 28% to $892 million, with per-share earnings of $0.88.
As for the Mercedes group, it finally posted positive earnings despite sales and revenues decreasing 4%. However, it continues to be bogged down by its Smart model. Excluding expenses associated with the model, operating profit would have been $391 million in the quarter, rather than the $15 million the group actually earned.
OK, now on to the good stuff. As happy as the company and investors were about the quarter, the much bigger (and better) news of the day was that CEO Jurgen Schrempp will retire at the end of the year. That announcement likely led to the stock racing ahead by nearly 10% Thursday. The news that Chrysler CEO Dieter Zetsche would replace Schrempp also helped.
While Schrempp was backing the Smart model, which has been losing money since 1998, Zetsche was working to bring Chrysler back to profitability. He cut costs and helped launch popular models, including the Chrysler 300.
Zetsche will no doubt be taking control in an interesting environment, but one with a plethora of challenges, not only for DaimlerChrysler, but also for the automobile industry overall. Great new designs have rejuvenated consumer interest in Chrysler. However, some of its models are outdated, and the industry is all about "What have you done for me lately?"
Then, there's Mercedes. It's been years since it had its swagger as the top luxury line. While it may be creeping back to that status, it's not expected to reach its traditional levels of profitability until 2007.
Finally, the industry in general is at a critical point. By now, we all know the story of General Motors (NYSE: GM) and its employee pricing incentives, which were echoed by Ford (NYSE: F) and Chrysler. Just this week, GM announced it is ending the program, but would reduce its prices. At the same time, Toyota (NYSE: TM) said it would increase prices on its popular models. We'll have to wait and see what Chrysler decides to do, but it's my guess it will follow GM's lead.
So, it was a great day for DaimlerChrysler. But I'm still not inclined to jump on board at this point, particularly after the huge run-up in the stock price. While I like the company's overall performance and think the management changes are a good thing, I think the road ahead is still a bit long and foggy, not only for DaimlerChrysler, but also for the whole industry.
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Mike Cianciolo
welcomes feedback and doesn't own shares of any of the companies in this article.
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