(April 27/ 2017)
Automakers in Germany - Earning More, Spending More
On Thursday the published earnings of the three biggest German automakers – Volkswagen,Daimler, and BMW – came out. Although Daimler-owned Mercedes may keep zooming past BMW, all three companies beat investors’ expectations! Mercedes has kept its spot at the top of luxury car sales among Germany’s biggest automakers, with sales growth three times that of BMW. But there were perhaps more similarities than differences in the results of the big three. All are spending heavily on new technology that’ll (hopefully) win them a place at the top of the industry as electric and self-driving cars go mainstream.
What Does This Mean?
For the markets: Automakers in Germany are making big, expensive bets on the success of electric cars.
Even though BMW reported a drop in profitability versus last year, investors have chalked up those lower margins to the company’s investments in its electric car business. Daimler is also looking to make headway into that market: it’s investing €11 billion in electric cars over the next ten years, mostly for its Mercedes brand. Volkswagen is also making a huge push into electric cars as part of its “Strategy 2025”. The downside? The big increase in expenditures is hurting the profitability of all these companies but only in the short term.
The bigger picture: One of the greatest sources of strength for German automakers is China.
China has been a lucrative place for German automakers to do business in the past few years – auto sales grew there by over 15% last year and German cars accounted for 19% of all car sales. Last year’s sales figures were pushed up by a temporary tax break on car purchases, which left some wondering if the demand for cars would stick around – however, strong quarterly sales from German automakers in that market suggested those alarm bells might have been premature.
US Rail Picking Up Steam
In many ways,the freight railway industry is, the circulatory system of an economy – which is why better-than-expected results on Thursday from one of America’s biggest railway operators are good news for the global economy too! CSX, which controls most of the railroads in the eastern United States, beat Wall Street’s expectations when it reported that its revenues in the most recent quarter jumped almost 10% versus last year – a big amount given the US economy is growing only around 2%.
What Does This Mean?
For the stock: There is a bullish trend with investors regarding the prospects of a turnaround under CSX’s new boss.
An expert in reviving railway companies was recently hired by CSX to be its new CEO. His track record of keeping the trains on time, cutting costs and raising profits has already boosted investors’ optimism – the stock is up almost 80% in the past year. He’s only just taken over, so he probably shouldn’t be credited with the most recent quarter’s strong financial performance. For investors, however, it’s good news that the so-called “turnaround artist” is inheriting a company that already seems to have regained some momentum.
The bigger picture: The increasing railway activity can be a sign of an improving economy.
It makes sense that when economic growth improves,more stuff would get shipped by train: demand for raw materials such as coal and oil increases and more goods from container ships are transported from ports to stores. As such, CSX’s results could be a signal that the US economy is getting stronger, despite some suggestions to the contrary. It’s also good news, to some extent, for the global economy, since a sizeable chunk of CSX’s freight is destined for other countries (and more freight suggests greater global demand).
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