Ardan Livvey is a ‘Top Five’ investor in Deutz AG and we see a high bar being set by the performance of the company’s peers in European industrials during the third quarter of 2021, but continue to be disappointed by the lack of guidance from management in the run-up to its Q3 earnings results on November 10, on how the firm will match and should exceed basic benchmarks for the sector.
A spokesperson for Ardan Livvey, André Cabral, Senior Analyst said: “We have been pleasantly surprised by the paucity of earnings guide-downs and the resilience of European industrials in the third quarter despite strong headwinds from rising costs and increasingly challenging supply chain disruptions. Some companies are highlighting that the build-up in inventories will eventually sustain a rebound in profits once bottlenecks ease and production returns to more normal levels. Ardan Livvey concurs with this view, and we believe robust demand will drive higher volumes in coming months. Against this market background, the continuing silence of Deutz AG’s management on the detail of how they intend to boost profitability in response to our criticism in September that full year guidance is far too conservative is absolutely deafening and incomprehensible.”
The multiple share price premiums, compared with Deutz AG, of most of the company’s peers is at least partially due to their superior management execution. For example, the good set of results posted by Volvo in October, one of Deutz’s largest clients. The truck manufacturer is achieving strong margins and solid cost execution and the real highlights in its results were the end-market forecasts for 2022, as well as management’s projections for robust market demand to continue to exceed supply well into next year. These positive trends are likely to be mirrored by many of Deutz’ clients and suppliers.
We want to see such transparency in Deutz’s Q3 results presentation, including additional visibility on the profitability of the company’s Chinese operations; details on its strategy to improve the economic balance of its contracts, and its capital structure and capital allocation internal policies. As Ardan Livvey has previously highlighted, the company’s mid-year guidance was inappropriate, and we believe there is significant room for further margin expansion beyond that provided by the management. They finally need to focus on bringing the profitability of contracts to appropriate and healthy levels — a key area management have continuously failed to deliver on, and we have still not seen any detail on what’s been done to address this.
André Cabral concluded: “While we acknowledge that Deutz’ cost savings programme should help drive margins up in the short term, we need to see more details on the overarching strategy being undertaken to allow for higher profitability and margin expansion in the quarters to come. It is essential that Deutz’ management ensures that the necessary efficiency measures are implemented in the company’s operations to adapt to the new and challenging market environment.”
