Daimler AG announced strong fourth quarter results, as new introductions and model refreshments lifted the automaker’s profitability. The company’s revenues jumped 8% to 32.1 billion euros (~$43.6 billion), helped by higher sales of vehicles sold under the Mercedes-Benz brand. Net income stood at 1.7 billion euros ($2.3 billion), or 1.53 euros per share vs 2.31 euros per share during the previous year quarter. Income in the fourth quarter of 2012 was helped by the divestiture of EADS shares, to the tune of 913 million euros. 
During the quarter, Mercedes-Brand’s sales rose 7% to take the full year tally to 1.83 million units. Cars and vans sold under the Mercedes brand account for more than 70% of the valuation, as per our estimates. In addition to the Mercedes-Benz brand, the company also sells buses and trucks under the Daimler brand.
We have a price estimate of $78 for Daimler’s stock, which is about 10% lower than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.
New Models Lift Margins
Mercedes-Benz’s operating margins stood at 7.5%, an increase of 220 basis points on a year-over-year basis. The automaker had to offer lower incentives as the revamped line-up raised the overall demand for the company’s vehicles. The division’s margins had fallen to 3.4% in the first quarter of 2013, due to one-time costs associated with the launch of new/refreshed models, which even caused the automaker to lower its full year guidance. However, margins rebounded to 6.6% in the second quarter and improved further to 7.3% in the third quarter.
Mercedes’ introduced and refreshed a number of models in 2013, including the E-Class, S-Class and the new CLA. The product offensive is part of Mercedes’ strategy to regain the crown of the world’s largest automaker by 2020. Looking ahead, Daimler expects to raise the operating margins to 10% in the medium term. Rivals Audi and BMW regularly clock operating margins close to 10%, in addition to selling more vehicles.
In 2014, the automaker will also introduce the refreshed version of the C-Class, which accounts for more than a fifth of the unit sales. It is also introducing the GLA crossover, which is built on the same platform as the A-Class and the B-Class, but is likely to have fatter margins.  The new models will also use a greater proportion of common parts due to the nature of the architecture used in these vehicles. This should help cut the costs and boost the overall profits.
Huge Upside In China
Daimler’s CEO Dieter Zetsche said that the automaker sees a huge upside in China, where it has failed to replicate the success of its German rivals. The automaker made significant investments in 2013 in order to resuscitate its Chinese operations.
In November 2013, Mercedes acquired a 12% stake in its automotive partner Beijing Automotive Group for 625 million euros ($845 million), which will help the company acquire a greater control over its sales network. Previously, Mercedes had struggled to align the sales of its imported vehicles with those that are produced locally, resulting in the two competing against one another. With this investment, the automaker aims to rectify this mistake.
Prior to that, Mercedes also committed 2 billion euros ($2.7 billion) to raise the level of local production in the country.  Increasing the local production level will make the cars more affordable (by circumventing an excise duty of 25%) and boost overall sales. The upcoming C-Class will also be produced locally to make it affordable and increase its appeal to first time luxury car buyers
In addition, Mercedes has also decided 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.
Mercedes sold 11% more vehicles in China in 2013, but sales were flat during the first half of the year.  It was only in the second half of the year that sales accelerated, after these steps began to gain traction. Going forward, we expect these investments, combined with new model releases, to help the automaker narrow the gap with its German counterparts.Notes: