Daimler AG Earnings Preview: Magnitude Of Margin Expansion In Focus

Daimler AG (NYSE:DAI) is scheduled to announce its Q3 earnings on October 24. In addition to the Mercedes-Benz brand, the company also sells buses and trucks under the Daimler brand. The company has had a number of things going in its favor in recent times which has helped the stock climb 15% in the last three months.

See full analysis for Daimler AG

Management had always maintained that the second half of the year would be better than the first half. This should have been factored in the stock price earlier, but the company often failed to live up to its guidance over the last two to three years. Thus, there were concerns whether the automaker would be able to deliver on its promise. Now with investors actually witnessing an improvement in operations, the possibility of the automaker meeting its guidance has increased.

Secondly, German voters have recently re-elected Angela Merkel for her third consecutive term. Merkel’s center-right Christian Democratic Party (CDU) has been generally kind to Germany’s automotive industry in the past. For example, 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.

Lastly, there is a genuine belief that the European automotive market has bottomed out. The year started off poorly but the market has shown positive growth twice in the last three months. Europe is the biggest market for Mercedes with the automaker selling about half its vehicles in the region.

Cars and vans sold under the Mercedes brand account for more than 70% of the valuation, as per our estimates.

Strong Unit Sales

Mercedes’ global unit sales are up 10.2% to 1.06 million through September, with sales accelerating in the latest quarter. ^[2] Sales this year have been helped by a number of model refreshments. Its best selling E-Class has been remodeled and introduced in major global markets. Similarly, the high volume A-Class has also been launched in China as well.

The new CLA model was recently 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 quite popular with the younger demographic. In addition, the refurbished S-Class model has already received 30,000 orders within three months of its launch. The automaker managed to sell only 65,000 S-Class models in 2012. ^[3]

The product offensive is part of Mercedes’ strategy to regain the crown of the world’s largest automaker by 2020. With the aforementioned model refreshments, we expect unit sales to remain solid for the remainder of the year.

There is also optimism about Mercedes’ Chinese operations with the automaker pouring in 2 billion euros ($2.7 billion) in the country in order to raise 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. Sales were already up 26% in September.

Margins Can Improve Further

Margins have been a worry for the automaker. In the first quarter, Mercedes’ operating margins had dropped to 3.4% due to extra expenses associated with model makeovers. However, margins rebounded strongly to 6.6% in the second quarter as the one time expenses subsided. ^[5]

As the sales of the refreshed models gain traction, we could see margins widening further in the subsequent quarters. The automaker needs to improve its margins if it wants its profits to match those of Audi and BMW. Mercedes’ rivals, Audi and BMW regularly clock operating margins in excess of 10%. The new models should stabilize its pricing, which in turn should lift the margins as well.

We have a price estimate of $72 for Daimler’s stock, which is about 10% 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. September the best ever month for sales in Mercedes-Benz’ history, October 4, 2013, daimler.com [↩]
3. Daimler gets over 30,000 orders for new Mercedes S-Class, October 18, 2013, reuters.com [↩]
4. Daimler Aims to Double China Car Output, wsj.com [↩]
5. Daimler Investor Relations [↩]