Daimler Earnings Review: Profitability For Mercedes-Benz Rises on Improved Efficiency

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DAI
DAIMLER AG

Auto company Daimler AG reported revenue growth of 6% to €31.5 billion (around $42.5 billion) in the second quarter on July 23. Excluding the impact of unfavorable currency translations, organic sales rose by 11%. [1] High demand for the company’s luxury vehicle brand Mercedes-Benz globally and trucks in the NAFTA region contributed significantly to the top line growth in the period. The Mercedes-Benz cars and vans division constitutes over 60% of Daimler’s valuation by our estimates. Mercedes sold 418,685 units in the three months, up 3% from 2013 levels, as demand remained high particularly in the U.S. and China. With the brand’s revamped version of the volume model C-Class going on sale in the U.S. and China by the end of the third quarter, volumes are expected to rise further. On the other hand, unit sales for the Daimler Trucks division rose only 2%, despite the 18% volume rise in the NAFTA region, as lower sales in Western Europe and Latin America dragged down net volumes.

Mercedes-Benz also neared its mid-term margin target of 9-10% with operating margins rising to over 7.9% in Q2. This comes as a result of the company’s continual efforts to improve production and operational efficiency. We have a $90.06 price estimate for Daimler AG, which is roughly in line with the current market price. However, we are currently in the process of incorporating the latest quarterly results into our forecasts.

See Our Complete Analysis For Daimler AG


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Mercedes-Benz Achieves Strong Growth in the U.S.

Volumes for Mercedes increased 7% to 81,914 units in the U.S. in the second quarter, partly impacted by pent up demand coming from the first quarter, where tough weather conditions slowed sales. Mercedes was the leading luxury vehicle manufacturer in the U.S. last year, however, has since reported lower volumes than its compatriot and chief rival BMW in the country. At 151,624 unit sales through June, Mercedes lagged BMW’s sales by 5,758 units. [2] 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. [3] 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.

Daimler Truck Volumes Fall in Western Europe and Latin America

While unit sales of trucks in the NAFTA region rose 18%, representing 32.6% of Daimler’s net truck volumes in the quarter, Western Europe and Latin America volumes fell. In 2013, trucks constituted one-fifth of the overall volumes for Daimler, and formed over 90% of the net unit sales for Daimler International. According to our estimates, Daimler International, comprising trucks and buses sold outside North America, is the company’s second most valuable division, contributing almost one-fifth to the net value. Western Europe is the most important market for Daimler Trucks’ international division, constituting 14% of the net volumes last year. 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. [4] Following the panic purchases at the tail-end of 2013, unit sales for Daimler Trucks in Western Europe fell 7% year-over-year in Q2. In the first quarter as well, the company’s truck sales in the region fell 3% year-over-year to 11,632 units, although the net volumes rose 7%. [5]

On the other hand, Daimler’s truck sales fell by a large 26% in Latin America (excluding Mexico), representing under 10% of the company’s net truck unit sales this quarter. This decline in truck demand is a consequence of continued economic instability in the region this year. Especially in Brazil, demand for medium- and heavy-duty trucks fell owing to weak economic conditions, with rises in unemployment and interest rates this year. However, amid tough conditions, Daimler improved its market share in Brazil to 25.7% in Q2, up from 24.9% in the second quarter last year. The company expects Latin America volumes to remain relatively weak going forward, with 10% decline in demand for medium- and heavy-duty trucks this year in Brazil.

Profitability Rises For Mercedes Due to Price Mix and Higher Efficiency

Operating margins for Mercedes-Benz grew around 160 basis points from previous year levels to 7.9% this quarter. Profitability rose on the back of higher unit sales and favorable volume and price mix. Margins expanded on the back of Mercedes’ aim to realize €2 billion in savings in 2014, which will be fully effective by next year. The company accomplished 55% of the planned efficiency volume by the end of Q2 and expects to achieve 70-80% of the total volume by the end of 2014. ((Daimler earnings transcript)) In addition, sales for the relatively expensive E-Class and S-Class models increased by 8% and 85% respectively to boost net price mix for the brand. On the other hand, the lesser priced compact C-Class model posted lower sales as consumers waited for the new model launch in the U.S. and China. With expansion in margins this quarter, Mercedes closed on its mid-term operating margins target of 9-10%, similar to the operating margins reported by both BMW and Audi.

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Notes:
  1. Daimler 8-k []
  2. BMW June sales []
  3. News release, al.com []
  4. Europe will rebound, scania.com []
  5. Daimler Q1 report []