Why Daimler’s Stock Has Been Cruising Lately

Daimler AG (NYSE:DAI) had a torrid start to the year. Its full year 2012 and Q1 2013 results were below expectations and there were concerns that its Mercedes unit would fall further behind BMW and Audi. However, things have finally started to look brighter for the automaker. Shares of Daimler are up more than 30% in the trailing three months. Here we investigate the reason behind the surge in the share prices.

a) Merkel’s Victory in Parliamentary elections

With Germany’s voters electing Angela Merkel for the third consecutive term, Daimler, BMW, Audi & co. should be a happy lot. Angela Merkel’s center-right Christian Democratic Party (CDU) has been generally kind to Germany’s automotive industry. Earlier in the year, Germany helped bypass an EU draft that limited CO2 emissions to 95 grams per kilometer by 2020. ^[1] A fiscally conservative government at the center should be in the best interest of the influential German automotive industry.

b) Margin Expansion

This year is a huge one for Mercedes as it has debuted a plethora of new models. The new CLA has already been launched in the U.S. to compete against the likes of BMW’s 1-series and 3-series, and Audi’s A3 and A4, which are hugely popular with the younger demographic. The high volume A-Class has also been launched in China as well.

The E-Class, which accounts for a quarter of Mercedes’ global sales, has been remodeled and is available to customers. ^[2] Furthermore, the refurbished S-Class will also be soon available to customers.

Mercedes’ vehicle sales are up an impressive 9.3% through August. ^[3] Higher sales help spread out fixed costs such as R&D and SG&A over a bigger revenue base. Furthermore, all these model refreshments should help lift pricing which in turn should boost profitability.

Daimler’s operating margins fell to 3.4% in the first quarter due to one-time costs associated with the launch of new/refreshed models. However, margins rebounded to 6.6% in the second quarter. As the automaker sells more reimaged models, its profitability could improve further.

See full analysis for Daimler AG

c) Optimism About Chinese Sales

Mercedes recently announced its decision to pour in 2 billion euros ($2.7 billion) in China in order to raise the local production. ^[4] Currently, about a half of Mercedes cars sold in China are imported and are subject to excise duty of 25%. Raising the local production level will make the cars more affordable and boost overall sales.

Besides raising the production level, Mercedes also plans to add 50-75 new dealerships across the country annually starting from 2013. Due to a limited number of dealers, people in the interior regions find it difficult to purchase a Mercedes. Audi and BMW, on the other hand, have a much better coverage and is one of the reasons why these companies have outperformed Mercedes in China.

A combination of new models, better affordability and mushrooming dealerships should enhance Mercedes’ Chinese sales.

We have a price estimate of $72 for Daimler’s stock, which is about 5% lower than the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Angela Merkel’s wrecking of EU car emissions deal risks her reputation, June 29, 2013, theguardian.com [↩]
2. 2014 Mercedes-Benz E-Class Pricing Announced, June 17, 2013, edmunds.com [↩]
3. Mercedes-Benz posts strongest August performance ever with 18.7% growth, September 5, 2013, daimler.com [↩]
4. Daimler Aims to Double China Car Output, August 27, 2013, wsj.com [↩]