Daimler Earnings Preview: Margins Under Spotlight, S-Class Could Boost Pricing

by Trefis Team
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Daimler AG
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Daimler AG (NYSE:DAI) is scheduled to announce its Q4 and full-year earnings on February 6. In addition to the Mercedes-Benz brand, the company also sells buses and trucks under the Daimler brand. Cars and vans sold under the Mercedes brand account for more than 70% of the valuation, as per our estimates. The company has had a very strong end to 2013, with shares of the company up 15% in the last six months. After a strong third quarter showing, the company now expects the fourth quarter profits to exceed those in Q4 2012. However, for the full year, profits would still trail those in 2012 due to weak results in the first quarter of the year. [1]

The automaker introduced a number of new and refreshed models in 2013, including the E-Class, S-Class and the new CLA, due to which sales accelerated in the second half of the year. The product offensive is part of Mercedes’ strategy to regain the crown of the world’s largest automaker by 2020.

We have a price estimate of $78 for Daimler’s stock, which is roughly in line with the current market price.

Here are some of the trends to watch out for in the upcoming earnings:

(a) Margin Expansion

Investors will be keenly eyeing the reported operating margins since the automaker is targeting long term margins of 9-10% for its Mercedes division. During the first quarter of 2013, the automaker’s operating margins had declined to 3.3% due to a number of one time expenses associated with model makeovers. However, the margins rebounded to 6.6% in the second quarter and improved further to 7.3% in the third quarter. [1] Mercedes’ refreshed portfolio has pushed up the average pricing, which has expanded the overall margins.

Daimler’s management had always maintained that the second half of the year would be better than the first half. However, it remains to be seen whether the company can improve its margins from here on. It is also important to take into account that margins usually shrink in the fourth quarter (on a sequential basis), since automakers offer greater incentives and discounts to meet their annual targets as well as to boost sales in order to claim the bragging rights of highest selling vehicles.

(b) Unit Sales Growth

Mercedes narrowed its gap with Audi in 2013 as its unit sales rose 11% to 1.45 million units. In the U.S., Mercedes edged out BMW as the number one luxury automaker, helped by the introduction of the all new CLA. The automaker sold 312,534 units in the U.S. in 2013, about 14% more than the 2012 figure. [2] Furthermore, Mercedes also showcased the remodeled version of the C-Class at the Detroit Auto Show. A new SUV, named the GLA, will also be released in March this year.

In China, Daimler’s sales jumped 11% to 218,045 units. [3] Sales accelerated during the second half of the year, helped by an expanded portfolio, a better dealership network and an improved sales network. Daimler is also manufacturing more vehicles in China in order to by pass the country’s high import duties. In August 2013, the automaker pledged 2 billion euros ($2.7 billion) to raise the level of production in China. Prior to this investment, Mercedes imported half of its vehicles in China. If these investments have the intended effect, Mercedes should continue to narrow the gap with its German rivals.

Mercedes’ European sales are also extremely critical to the company’s bottom line. In fact, Western Europe accounts for about 50% of Mercedes unit sales. The European auto market declined in 2013, but the general consensus is that the market has bottomed out and should grow 2-3% in 2014. Thus, any improvements in the overall automotive market should benefit all automakers, including Mercedes. In 2014, Mercedes’ sales gain could come from an unlikely source – Europe.

(c) Pricing

The pricing realized by the company will be a key metric to watch out for. A deterioration in the average revenue per model suggests that most of the incremental sales are coming from the lower priced vehicles and/or that the automaker is having to offer greater incentives in order to lure customers. In such a scenario, Daimler might find it difficult to achieve its long term margin projections.

Similarly, an increase in the average revenue per model would suggest that the company’s vehicles are proving to be popular among its customers and that it doesn’t have to survive on razor thin margins. Mercedes received 30,000 orders of the refreshed S-Class (often costing more than $100,000) within three months of its launch. Therefore, we could see some pricing gains in the fourth quarter, helped by the S-Class. On the other hand, there could be some deterioration in the full year pricing due to tepid first quarter results, combined with the strengthening of the dollar in 2013.

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Notes:
  1. Daimler AG Q3 2013 [] []
  2. Mercedes Edges Out BMW For 2013 U.S. Luxury Car Sales Crown, January 6, 2014 []
  3. Daimler Investor Relations []
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