Booming Mercedes-Benz Creates 17% Upside for Daimler

Daimler (ETR:DAI), a German automotive company, sells vehicles under the Mercedes-Benz, Smart and Maybach brands.  Daimler competes with global automotive companies such as Ford (NYSE:F), Toyota (NYSE:TM), BMW (ETR:BMW) and Audi (ETR:NSU).

Daimler reported spectacular performance for its Mercedes-Benz division in the second quarter of 2010, thanks to euro depreciation, rising luxury car demand, quality improvements and a successful model mix. As a result we have boosted our price estimate for Daimler’s stock by 17%, from $54 to $63. Our analysis follows below.

Higher Mercedes-Benz Margins

We now expect gross margins for Mercedes-Benz cars and vans to reach 27.5% for 2010, up from 25.5% in 2009, and we expect Daimler to maintain these margins over the forecast period. You can drag the trend-line in the chart below to modify our gross margin estimate and see how it impacts Daimler’s share value.

We attribute these margin improvements to the following trends:

Euro depreciation: Since January 1 of this year, the euro has depreciated by more than 10% against global currencies such as the U.S. dollar, the Japanese yen and the Chinese yuan. This trend helps Daimler price its vehicles attractively to foreign buyers because its revenues are generated in foreign currencies and the resulting additional foreign sales help to raise overall margins.

Rising demand: As global economic conditions start to improve, demand for luxury vehicles is rising, especially in emerging Asian markets such as India and China. China and the U.S. together account for approximately 30% of overall Mercedes-Benz sales.  In the second quarter of 2010, vehicle sales tripled in China and grew by 16% in the U.S. compared to the same period in 2009.

Demand for the newly-introduced long versions of the E-class and S-class Mercedes models remains strong. Meanwhile, Mercedes-Benz has set new efficiency benchmarks in the premium segment with its newly developed V6 and V8 engines.

Gaining from competitors

Although BMW and Audi remain formidable competitors in the luxury vehicle market, we expect Mercedes-Benz to gain market share from Toyota due to the Japanese giant’s well-publicized quality and safety problems. Toyota’s premium Lexus brand is suffering from vehicle recall problems. Toyota plans to recall 270,000 Lexus and Toyota Crown vehicles across the United States, Japan, Canada, Australia, Europe and elsewhere due to a potential defect that could lead to engine failures.

You can see our complete $63 Trefis price estimate for Daimler’s stock here.