Daimler AG (XTER:DAI, Financial) (3.1% portfolio weight) - Daimler’s Mercedes-Benzautomobile unit is grappling with a very similar set of issues to BMW and is similarly expected to show that high prices for its vehicles outweighed the impact of reduced volumes. Daimler is also extremely well-capitalized and producing unusually high levels of free cash flow7 as margins are high and inventories have been sold down to levels well below normal. Interestingly, Daimler management has been one of the first to indicate that some of the industry changes experienced recently may be incorporated into normal business practices going forward. Specifically, management suggested that carrying large amounts of inventory to enable very rapid delivery of a new Mercedes to a buyer may have more cost than benefit in terms of leading to higher levels of price discounting when inventories swell and in terms of the working capital consumption of the business. The explicit message was that the company and its peers may work to change their behavior in a way that produces higher prices and higher margins going forward while imposing somewhat longer wait times on customers. We will be looking for confirming data points as/when chip and shipping challenges abate. In the near term however, Daimler shareholders recently approved Daimler’s plan to spin-off its Daimler Truck unit by the end of 2021 and rename the remaining auto business Mercedes-Benz Group AG. A possible separation of trucks from cars was a component of our original investment thesis and we expect that the spin-off process will continue to surface value.
From the Third Avenue Value Fund (Trades, Portfolio)'s third-quarter 2021 commentary.
