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Investment Overview for Daimler AG (PINK:DAI)
Daimler AG (Daimler) is the parent company of the Daimler Group. The company is engaged in the development, manufacturing, distribution and sales of a wide range of automotive products but mainly, passenger cars, trucks, vans and buses. Daimler has operations mainly in the US and Germany and sells its vehicles worldwide under various brands such as Mercedes Benz, Maybach, Smart, Freightliner, Fuso, Western Star, Detroit Diesel, Orion and Setra.
Total Mercedes Benz Sold Globally:The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million. In 2012, the momentum continues as the industry was able to continue its double-digit growth. The response to the company's new model CLA, aimed at the first time luxury car buyers, will be critical in deciding its profitability. Mercedes-Benz sold 1.46 million vehicles in 2012 and we expect the figure to rise to 2.1 million by the end of the forecast period. In case, the growth rate accelerates and the company is able to sell 2.3 million vehicles annually by 2019, there could be a 10% upside to the current price estimate. On the other hand, if the brand is not able to capitalize on the growing demand of luxury cars globally, there could be a 10% downside to our estimates in case the company is only able to sell 1.8 million vehicles annually by 2019.
Going forward, the growth in the U.S. automotive industry would be a very critical factor for the company to maintain growth in the top line.
Total Vehicles Sold Globally:According to statistics and analysis of the China Association of Automobile Manufacturers (CAAM), China registered automobile sales of approximately 20 million for 2012, an increase of 4% from a year earlier. The automotive market in China has more than doubled in size within a span of 4-5 years. Though the growth in 2012 was way below the incredible growth of 45.5% and 32.4% achieved in 2009 and 2010 respectively, China is well and truly on its way to become the leading automotive market, pushing the U.S. in the second place. According to KPMG, China is slated to be the world’s biggest market for auto sales and exports by 2025. With approximately 52 cars per thousand people in China, there is definitely an enormous opportunity to be tapped in China. The rise in demand of luxury vehicles in China could serve as a catalyst for growth in emerging markets.
Europe has been going through the toughest times since the adoption of a single currency in 1999 and the crisis that started from Greece has spread through other peripheral countries as well. The economy is still in distress and governments across the Europe are adopting austerity measures to ride through the situation which is not going to help the industry either. Although, the severity of the economic distress will be different for different economies, the overall trend in sales as well as production is expected to be a declining one. A worsening situation in Europe could prove to be a major dampener for the company.
The Mercedes Benz Cars and Vans division is the most valuable business for Daimler AG. It is more valuable than the combined business of Daimler North America and International combined. Daimler's vehicle financing business which consists of leased vehicles and vehicle loans is more valuable than the company's Daimler truck and bus business.
Mercedes Benz Cars and Vans segment is nearly twice the value of Daimler's International and North America divisions:
We estimate that high prices and unit sales of Mercedes Benz contribute the maximum value for its business. Mercedes Benz can fetch higher prices because of its strong brand name. It hopes to tap onto emerging markets such as China, India, Russia and Latin America, to help increase sales and grow market share. China is the biggest market for luxury vehicles and Daimler expects China's sales to surpass that of the US and UK in the current year.
International vehicle market nearly four times larger than the North American vehicle market:
In 2011 vehicle sales in North America were around 13 million units. In comparison, there were almost four times as many vehicle sales (around 56 million) internationally. We estimate that Daimler's international trucks and buses business is worth more than twice its North American business.
Strong demand from emerging markets
Although the vast majority of Daimler's sales continue to be in Western Europe and North America, the company's sales continue to grow rapidly in the developing world, especially in the emerging markets, which include Brazil, Russia, India and China (BRIC nations). Consumers in these developing economies recognize the importance of the Mercedes brand name.
Daimler is seeking to take full advantage of its brand names by organizing a number of joint ventures with local companies in these regions. In Feb 2012, Daimler launched its new brand of trucks in India by the name of Bharat Benz.
Daimler's car business has grown substantially in Asia (excluding Japan), especially in China. In China, Mercedes-Benz experienced a 62% year-over-year growth in 2011. China accounted for 16% of Mercedez-Benz cars' global unit sales in 2011.
Rising commodities costs can pressurize margins
Raw materials for Daimler vehicles include rubber, plastic and copper. Rising commodities costs would increase production expenses for Daimler.
Growing consumer interest in fuel efficiency cars
Consumers are moving toward more environmentally friendly and fuel efficient automobiles. This is occurring for a multitude of reasons, including political tension in the Middle East, rising oil prices due to growing demand in the developing world (especially China), and increasing concern over global warming. Daimler's BlueEFFICIENCY program seeks to improve fuel economy by 12% for the company's entire fleet of vehicles. This initiative will consider everything from engine efficiency, to aerodynamics and tire roll resistance.
Daimler's automobiles provide a more difficult comparison because as a luxury brand, buyers often will opt for performance over fuel efficiency. This is especially true in the US market where Mercedes-Benz's smallest engine is a 3.0 liters with six-cylinders. This is larger than the smallest engines sold in the US by other European luxury automakers such as BMW or Audi.
In Europe, Daimler markets many smaller gasoline and diesel engines. However, the fuel efficiency of these models is similar to cars from other automakers, with Daimler having the lowest overall fleet efficiency of any major European automaker. In an attempt to improve this, Mercedes is planning to roll out several hybrid-electric models in the near-term. The overall fuel efficiency is not a major selling point for Daimler automobiles.
Influential labor unions in Germany
Since a significant portion of Daimler's labor force is unionized, attempts to reduce labor costs are typically met with stiff resistance. More than 50% of Daimler's employees are employed in Germany, which has stringent labor laws that make layoffs exceedingly difficult.
Moreover, Daimler's supervisory board consists of 20 members, 10 selected by shareholders and 10 elected by Daimler's employees. This means that employees have the same degree of influence over important decisions as shareholders. These factors make Daimler less flexible in adjusting to changing market conditions than automakers that can easily lay off workers or make other changes to the business without consultation or agreements with employees.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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