By Stephen Wilmot 

Daimler has set the bar high for the automotive sector's coming results season -- perhaps too high.

The maker of Mercedes-Benz cars unveiled much better-than-expected third-quarter numbers, in a surprise update ahead of its full earnings report next week. Operating profits came in at roughly EUR3.1 billion, equivalent to $3.6 billion, the best result in 2 1/2 years. Most surprisingly, free cash flows from the core automotive business totalled EUR5.1 billion, boosted by pandemic-related cash-preservation measures and a fat dividend from Daimler's Chinese joint venture.

In part, the update -- and the 5% jump in Daimler stock it triggered Friday morning -- can be taken as a bullish signal for the entire sector, most of which reports third-quarter numbers over the coming three weeks. But only in part.

Vehicle sales have been very strong this summer as consumers have shunned public transport and taken advantage of low interest rates and government stimulus money. Limited inventories following spring production closures have also kept discounting in check. Investors are likely expecting most companies to beat cautious forecasts, but Daimler's results show there is still room for them to be genuinely surprised.

However, Daimler isn't typical in two important ways. One is its exposure to China, the market recovering fastest from the pandemic, particularly at the luxury end. In the third quarter, the company sold almost 4% more Mercedes-Benz vehicles than in the same period last year, largely thanks to a 23% jump in China. Sales in Europe were roughly flat, while they fell 9% in the U.S. Daimler's local rivals BMW and Volkswagen similarly have more to gain than most global auto makers from the Chinese rebound.

Second, Daimler is in the middle of executing a turnaround after a string of profit warnings before the pandemic. This may have prepared the company better than others to conserve cash this year. Germany's "Kurzarbeit" program for partially furloughing workers also helped. Some costs will come back, but others won't. Chief Executive Ola Källenius, who took the reins last year, said at an investor event last week that he wants to trim fixed costs by 20% over the six years through 2025, with variable costs also falling 1% a year.

Looking beyond a strong third quarter for Daimler and its peers is difficult. Covid cases are rising fast in Europe, while much of the stimulus spending that kept the U.S. consumer economy on track this summer has expired. On the other hand, the pandemic seems to be reviving interest in car ownership and suburban living. That is positive not just for new-car sales but also the second-hand market and residual values that shape the results of auto makers' financing arms.

How profits in the industry progress from here is subject to an unusual level of uncertainty, but the recovery rush of recent months will be hard to match. For auto investors, Daimler's third-quarter performance may be as good as things get for a while.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

October 16, 2020 10:13 ET (14:13 GMT)