German automaker Daimler AG is scheduled to announce its Q2 results on July 23. The company’s stock has grown by almost 32% in the last year, fueled by growth in emerging economies and rebounding developed markets. Daimler’s luxury vehicles division Mercedes-Benz, which constitutes over 60% of the company’s valuation by our estimates, sold 409,244 units from April to June, up around 11% year-over-year. Continued rise in China sales and strong U.S. volumes are expected to drive top line growth this quarter. In addition, bolstered by new model launches, including the compact sedan C-Class and the new compact SUV GLA in March, along with stabilizing economies, Mercedes’ Europe volumes also rose 7.4% in the first half of the year.  On the other hand, the Daimler International division, comprising trucks and buses sold outside North America, is also expected to draw growth from the pickup in economic activity in Western Europe. According to our estimates, Daimler International is the company’s second most valuable division, contributing almost one-fifth to the net value.
Mercedes-Benz lost the global luxury sales crown to BMW in 2005, and now ranks third behind both its compatriots BMW and Volkswagen AG‘s (OTCMKTS:VLKAY) Audi in terms of global volumes. Mercedes also posted fewer volumes as compared to BMW in the U.S., its single largest market, in the first half of the year. In order to regain the global luxury sales crown from BMW by the end of the decade, the luxury brand has adopted a growth-offensive strategy of launching 30 new models through 2020, and expanding production capacity in international markets. However, due to this aggressive strategy, profitability for Mercedes is expected to be hampered this quarter, and in the near term.
We have a $90.06 price estimate for Daimler AG, which is around 2.5% above the current market price.
- Why Mercedes-Benz Is ~70% Of Daimler’s Value, As Per Our Estimate
- Daimler Earnings Review: Profit Declines As Currency, Negative Mix Impact Results
- Daimler Earnings Preview: Record Sales For Mercedes To Spearhead Strong Q1 Results
- Where Will Daimler’s Revenue And Gross Profit Growth Come From Over The Next Three Years?
- How Has Daimler’s Revenue And Gross Profit Composition Changed Over 2012-2016E?
- What Is Daimler’s Fundamental Value Based On Expected 2016 Results?
Mercedes Loses U.S. Sales Lead to BMW, But Volumes Continue to Grow
Mercedes fended-off growing competition from BMW to hold the lead in the U.S. luxury auto market last year, however, the company has since posted lower volumes compared to the latter in the first half of the year in the country. At 151,624 unit sales through June, Mercedes lagged BMW’s sales by 5,758 units.  However, Mercedes lost its lead to BMW only in the second quarter, after selling higher volumes in Q1. One of the main reasons why Mercedes hasn’t caught up with its compatriot in the U.S. so far this year is due to pending launches of the compact sedan C-Class and B-Class Electric Drive (ED). The C-Class is a high-volume model for Mercedes, constituting over one-fifth of the company’s U.S. June sales. However, the model’s volumes fell year-over-year through June as consumers waited for the new generation model. In June, the company began local production of the new C-Class in its U.S. plant in Tuscaloosa, Alabama, which presently manufactures only the sports utility vehicles (SUVs) M-, R-, and GL-Class. For this purpose, the automaker has spent over $2 billion on the Alabama plant to expand capacity for the C-Class along with other models.  The compact luxury model will roll-out in the U.S. in September, and could strengthen Mercedes’ compact sales in the country, as well as help narrow the company’s gap with BMW, going forward.
On the other hand, Mercedes also entered the fast growing electrically-powered vehicles market in the U.S. with the mid-July launch of the B-Class ED. BMW’s electric car, the i3, has already been on sale since May in the U.S., recording the highest sales for any plug-in electric vehicle (PEV) in its debut month, and selling 694 units in two months in the country.  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, PEVs also have lower battery prices, adding to their appeal. The PEV global market is expected to sell over 2.7 million units globally by 2018, a massive rise from around 180,000 unit sales in 2013.  As the U.S. constitutes over 45% of the global PEV market at present, Mercedes will look for growth in this market going forward. The luxury brand’s volumes in the U.S. grew by 8.5% year-over-year in Q2, mainly due to the pent-up demand following the unusually cold winter and slowdown in economic activity in Q1. With local production of the C-Class and launch of the electric car B-Class ED, Mercedes’ U.S. volumes should grow further in the following quarters.
Europe Business to be Impacted by Daimler Truck and Compact Sedan Volumes
In 2013, trucks constituted one-fifth of the overall volumes for Daimler, and formed over 90% of the net unit sales for Daimler International. Daimler’s trucks are manufactured and sold under brands such as Freightliner, Western Star, Thomas Built Buses, Mercedes Benz, Fuso, and BharatBenz. Western Europe is the most important market for Daimler Trucks’ international division, constituting 14% of the net volumes last year. Daimler accounts for almost one-fourth of the total truck sales in Western Europe, and holds market share of around 40% in Germany. Although in the long term, truck volumes are expected to rise due to stabilizing economic conditions in the region and replacement of ageing vehicles, volume growth in the second quarter is estimated to remain low. With the Euro 6 emission standard going into effect at the beginning of 2014, large-scale pre-buys of Euro 5 vehicles and discounts offered on the new Euro 6 vehicles increased truck sales in the latter half of 2013.  Following the panic purchases at the tail-end of 2013, unit sales for Daimler Trucks in Western Europe could fall in Q2, as compared to 2013 levels. In Q1 also, the company’s truck sales in the region fell 3% year-over-year to 11,632 units, although the net volumes rose 7%. 
While truck volumes might fall in Europe for Daimler, unit sales for the Mercedes brand are expected to rise in Q2 in the region. Growth could be driven by the introduction of new compact models in the region. Mercedes launched the revamped C-Class and its new compact SUV GLA in Europe in March, which should impact sales for the company in the region in Q2. Amid weak economic conditions, as consumers looked to avoid luxury spending, the Western Europe car market witnessed 2% decline in volumes last year. The region is crucial for Daimler’s business, contributing just over one-third to the top line in 2013. However, Mercedes-Benz recorded a 7.5% rise in volumes in Q1 in Europe, with major markets such as Germany and the U.K. returning to growth. Fueled by an uptick in economic activity, high demand for the refreshed C-Class and incremental sales from the new GLA model in its first full quarter in Q2, Mercedes’ volumes increased 7.4% in Europe through June.
Margins To Grow Compared To Previous Quarters, But Still Lower Than BMW, Audi
Operating margins for Daimler are expected to improve from last year, due to higher sales volume, higher pricing of new models and fewer one-time costs. In Q1 2013, Daimler had incurred higher start-up costs related to model makeovers, which narrowed margins for the Mercedes-Benz division down to 3.4%. But since then, margins have been rising in each subsequent quarter, reaching 7% in Q1 this year. Profitability is expected to rise this quarter, as compared to Q2 2013, in which operating margins stood at 6.3%. The new models use a greater proportion of common parts due to the nature of the architecture used in these vehicles. This should help cut costs and boost overall profits for Daimler this quarter.
However, margin expansion might not be substantial due to continued high costs of model makeovers and development costs. Mercedes aims to introduce at least 12 all-new vehicles through the end of the decade, as part of its growth-offensive strategy of becoming the largest luxury automaker by 2020, which should constrict margin-expansion for the company this quarter. But Mercedes could achieve its target of 9-10% operating margins in the medium term, as the brand expands production in low-cost countries such as Mexico and Brazil, and also extends local production in the U.S. and China, evading tax tariffs and high transportation costs. Mercedes’ margins are presently lower than those of BMW and Audi, which posted operating margins of 9.5% and 10% respectively in the first quarter this year. Notes: