Down not up DAX earnings suffering despite economic boom

Investments, a strong euro and a certain US president are putting the brakes on earnings growth in Europe's biggest economy.

Germany’s economy may be on track for another record year but earnings at the country’s biggest companies are faltering amid a strong euro, threats of a trade war and investments. Operating profit at the 30 companies listed in the benchmark DAX index slipped 11 percent to €33.2 billion ($38.6 billion) from April through June, according to consultancy Ernst & Young, despite a 0.5% increase in gross domestic product.

While the strong euro stripped €10 billion from the second-quarter sales of the export-oriented DAX companies, analysts say the biggest item hurting the bottom line is investments in personnel and the future. “Certain temporary hits to profit just have to be accepted,” said EY board member Mathieu Meyer. “But in the end, investing in the future and more agile structures makes companies more competitive.”

The stagnant profits have pushed the DAX down more than 6 percent this year as companies cautioned investors that their earning would, at best, match 2017 when net profit at the DAX companies came in at a record €95 billion. Wednesday was no different – pharmaceutical giant Bayer unveiled a disappointing outlook as it integrates its monster $63-billion acquisition of Monsanto.

Car sales in China

Consumer goods maker Henkel also recently said it saw headwinds from rising raw material prices and currency turbulence in Russia, Turkey and Mexico, its key markets. Its net income fell by 4.2 percent to €598 million in the second quarter, sparking it to reduce its full-year earnings per share forecast to growth of as much as 6 percent, down from a previous outlook of 8 percent.

Henkel and Bayer aren’t alone – Deutsche Post DHL, industrial company ThyssenKrupp, carmaker Daimler and automotive supplier Continental have also all rejigged their outlooks recently. Many companies are increasingly unable to pass on double-digit increases in raw materials to their customers – oil, for example, has climbed 45 percent in the past year. And President Donald Trump’s trade noises aren’t helping.

Meanwhile, German automakers, like BMW and Daimler, suffer when they export cars produced at US plants to China. Higher import duties make the models more expensive, hurting sales – Daimler has already said that new tariffs will keep it from meeting its SUV sales goals in China. "The increasing risk of a trade war suggests that the somber mood is more than just a brief dip in growth," Commerzbank Chief Economist Jörg Krämer said.

Continental, which makes drive trains and tires, also twice missed goals this year with CFO Wolfgang Schäfer blaming weaker business in Europe and China.

The future is now

Despite the blame game, the lower profits are primarily the result of investments. At Daimler, for example, R&D expenditures rose 15 percent to €1.6 billion following an 18-percent increase in the first quarter to €1.7 billion. BMW is also investing massively in electric mobility and autonomous driving, reducing pre-tax profit by 6 percent to €2.8 billion. The Munich-based company spent €2.6 billion on R&D in the past six months, after €2.3 billion in all of last year.

In total, 17 of the 30 DAX companies that report corresponding R&D figures increased their expenditures by almost 10 percent to almost €25 billion in the first half of the year, more than ever before.

Some of that investment is also in personnel. The DAX 30 companies employ nearly 4 million people and 22 have larger payrolls now than a year ago. Volkswagen remains the largest employer with 625,000 employees, 25,000 more than in 2017.

Andrew Bulkeley is an editor in Berlin for Handelsblatt Global. Ulf Sommer is a senior editor in Handelsblatt’s companies & markets section, based in Düsseldorf. To contact the authors: [email protected], [email protected]