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Investment Overview for Daimler AG (PINK:DAI)
WHAT HAS CHANGED?
Mercedes' operating margins are a strong 10% and above now
Driven by the high volume rise and product and price mix, Mercedes reported EBIT from ongoing business of €6.25 billion in the first three quarters, up 50% year-over-year, and profit margins of 10.2%. The company has recuperated well after one-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013. The automaker has made a comeback this year in terms of profitability. Mercedes was already catching up with BMW and Audi in terms of volumes, but this year the company has caught up in terms of profitability, as well, and, in fact, has surpassed both BMW and Audi in terms of operational performance.
Mercedes performing well in China despite the slower economic conditions
While Mercedes has performed well in the U.S. and Western Europe, as expected, as the overall automotive market in these regions has also grown strongly, the surprise has been China, which has been a key growth driver for Mercedes this year, while its chief competitors have suffered due to the slower market conditions in the country.
Economic conditions have become weaker in China, over previously seen high GDP growth levels, due to the fall in the stock market, industry overcapacity, and real estate and infrastructure sector slowdowns. This has caught up to the automotive industry in the country, too, with automobile sales growing only 0.3% year-over-year through September. However, Mercedes-Benz has defied the China slowdown and posted an impressive 39% year-over-year rise in unit sales in the country through the first nine months of the year. For reference, Audi -- the highest selling premium automaker in China, has witnessed a sales decline of 0.3% in the country.
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, BharatBenz, Orion, and Setra.
Total Mercedes Benz Sold Globally:The total Mercedes Benz Vehicles sold Globally decreased from 1.32 million units in 2008 to 1.08 million in 2009 due to intense competition as well as the global automotive and financial crisis. It has since recovered to around 1.46 million vehicles in 2011. In 2012, the volume rose to 1.52 million. Higher demand for compact luxury cars fueled growth in Mercedes car and van volumes, rising by 9.5% to over 1.66 million units in 2013. Trefis forecasts that this figure will increase to over 2.5 million vehicles. This growth is expected to be fueled by rising demand in China, the U.S., and stabilizing European markets. In case the growth rate accelerates and the company is able to sell 2.7 million vehicles annually by 2020, 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 2 million vehicles annually by 2020.
Total Vehicles Sold Globally: Historically, the global vehicle sales declined from 71.5 million in 2007 to around 65.6 million in 2009 due to the global recession. The market has recovered since and stood at 82.2 million and 85.4 million vehicles in 2012 and 2013, respectively. China, US, Japan, and certain European countries contribute the most to the Total Number of Vehicles Sold Globally. Trefis forecasts that global automotive industry sales will continue to improve gradually over the coming years, bolstered by growing disposable incomes in developing economies, and reach over 112 million units by the end of the decade.
However, if growth slows in some of the emerging economies, and/or economic conditions deteriorate in some developed markets, and the global automotive market reaches only 100 million units sales by 2020, there could be 8% downside to our price estimate for Daimler.
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.
Mercedes Benz Cars and Vans segment is more than 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.
International vehicle market three-and-a-half times larger than the North American vehicle market:
In 2013, the vehicle sales in North America were around 18.8 million units. In comparison, there were three-and-a-half times as many vehicle sales (around 66.6 million) internationally. We estimate that Daimler's international trucks and buses business is worth almost twice its North American business.
Mercedes-Benz aims to penetrate the electric vehicle market
- Demand for electric vehicles is rapidly rising around the world mainly due to a relatively less harmful impact on the environment and lower running costs, as compared to gasoline-powered engines. In addition, governments around the world provide various incentives to boost electric vehicle sales. Moreover, plugin electric vehicles (PEVs) also have lower battery prices, adding to their appeal. However, sales of these vehicles haven't picked up as previously estimated primarily due to lower ranges, and lack of infrastructure supporting battery charging.
But with more and more companies developing electric cars with higher ranges and building charging stations, plug-in sales are expected to continue growing at a fast pace. Due to these reasons, the PEV market is expected to sell over 2.7 million units globally by 2018, a massive rise from around 180,000 unit sales in 2013.
- Mercedes-Benz is set to begin shipping its first mass produced pure electric vehicle, B-Class electric drive (ED), in the U.S. in 2014. With this launch, Mercedes will compete with models such as the Nissan Leaf and the popular Tesla Model S in the fast growing U.S. plug-in electric vehicle (PEV) market. This also places the Mercedes B-Class ED in direct competition with its chief rival BMW's i3 pure-play electric car.
Seeing how BMW trailed Mercedes by only 3,248 unit sales in the U.S. last year, the reception and sales of the new B-Class ED and the i3 could be crucial in the race for the U.S. luxury sales crown.
Fast growing compact luxury vehicle market in China to provide growth
- The luxury segment constituted around 7% of the overall vehicle industry in China in 2013, wheres the corresponding figure in the U.S. stood at around 10-11%. Increasing disposable incomes and rising proportion of high net worth individuals in China are expected to drive growth in its luxury automotive market. Demand for lower range premium vehicles in particular could increase at a rapid rate, as Chinese consumers are considered typically more price-sensitive than their western counterparts. The compact segment is expected to constitute 20% of the luxury vehicle market in China by 2015, up from around 11% in 2012.
In November 2013, Daimler had acquired a 12% stake in BAIC Motor, the passenger car division of its China partner the Beijing Automotive Group, to further its business in the Chinese automotive industry. Together with BAIC Motor, Daimler will invest around $5.5 billion in China through 2015, one-fourth of which would be dedicated to capacity expansion and opening new engine production facilities. Presently, just over half of the vehicles sold in the country are locally produced, and Daimler aims to increase this proportion in the coming years.
Daimler had around 260 dealerships in China at the end of 2012, whereas both Audi and BMW had over 300 dealerships. Since then, Daimler added around 75 dealerships in 2013 and aims to open around 100 new dealerships in China in 2014. These new dealerships will mostly be in Tier 3, 4, and 5 cities, in order to cater to the potential consumer base seated deep into the country. With comparable number of dealerships to that of Audi's, coupled with increased local production and introduction of China specific models, Mercedes now aims to improve reach and availability, and compete with Audi on a pricing front in China.
Stabilizing European markets to fuel growth for Daimler Trucks
- The global commercial vehicle market, comprising medium and heavy trucks, and buses, grew by 5% in each of the last couple of years, reaching 22.75 million units in 2013. As infrastructure and construction activity picked up in Europe, truck registrations grew 7% in the first four months of 2014. With the Euro 6 emission standard going into effect at the beginning of 2014, large-scale pre-buys of Euro 5 vehicles increased truck sales by 14% in 2013 in Western Europe.
In addition, market share for Daimler also rose in Western Europe (~25%), performing better than its competitors in the stabilizing economies. Following the panic purchases at the tail-end of 2013, year-over-year volume growth is expected to slightly fall in the second half of 2014.
Going forward, the need for replacing older vehicles could boost truck sales. Demand for trucks was high during pre-recession years, but has decreased in the last few years. This also means that these vehicles call for replacement as they are now late in their service life. The average age rose from 4.1 years in 2001 to 5.3 years in 2013.
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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