The Week That Was: Volkswagen, Daimler And Tata Motors

Stocks of the three largest automakers in the world- Toyota Motor Corp (NYSE:TM), Volkswagen AG (OTCMKTS:VLKAY) and Daimler AG, fell by more than the decline seen in broader indices last week, with Volkswagen taking the biggest hit. Slowdown in vehicle production in South America and Europe, particularly Russia, is expected to weigh on the financials of these companies this year. On the other hand, Tata Motors‘ (NYSE:TTM) stock returned to positive growth last week, as the group unveiled its new Jaguar XE compact sedan and Land Rover Discovery Sport at the Paris Motor Show.

Below we discuss key events from last week in relation to the automotive companies in discussion.

Volkswagen

Volkswagen’s strong volume growth prospects have somewhat been thwarted by lower vehicle demand in countries such as Russia, Brazil and India this year. The group has also been punished for alleged monopolistic practices in another BRIC nation, China, and has seen its stock decline by almost 25% in the last three months. But the silver lining for Volkswagen has been its luxury portfolio. Audi, which forms over one-fifth of the company’s valuation by our estimates, grew volume sales in China by 16% to over 415,000 units through September. ^[1]

We have a $48.14 price estimate for Volkswagen AG, which is roughly 20% above the current market price. The stock price fell by 6.62% in the last week, after falling 6.1% in the previous week.

See Our Complete Analysis For Volkswagen AG

China is the largest market for Audi and the overall group, and continual dominance of Audi over compatriots BMW and Mercedes-Benz in the country, the world’s fastest growing luxury vehicle market, could bode well for Volkswagen, going forward. In fact, even sales of imported models such as the Audi Q7 and A8 L grew by high double-digit percentages in China, amid increased scrutiny on unfairly high-priced luxury imported vehicles in the country, highlighting continual strong demand for Audi. Porsche also continued to report strong volumes in the U.S., its single largest market, constituting 26% of the net volumes last year. In the first three quarters, Porsche’s U.S. volumes rose 12% year-over-year. ^[2]

One of the reasons why luxury vehicle growth is significant for Volkswagen is because of the large profit contributions by these vehicles. Although Porsche and Bentley constituted only 1.5% of the net volumes last year, these high-end luxury brands form almost 18% of Volkswagen’s valuation, by our estimates, due to higher average revenues and fatter margins. In fact, Porsche’s industry-leading profit margins allow the group to earn net profits per vehicle that are almost equal to revenues per non-luxury passenger car.

Daimler

Daimler’s luxury vehicle division Mercedes-Benz, which constitutes over 60% of the company’s valuation by our estimates, reported strong September sales in the U.S., edging out BMW’s unit sales of 25,586 by 1,729 units. ^[3] Mercedes fended-off growing competition from BMW to hold the lead in the U.S. luxury auto market last year, however, the company had since posted lower volumes compared to the latter in the first eight months of the year in the country.

We have an $87 price estimate for Daimler AG, which is roughly 16% above the current market price. The stock fell 3.72% in the last week.

See Our Complete Analysis For Daimler AG

U.S. is the single largest market for Mercedes, and with the revamped C-Class and S-Class models out in the country last month, the automaker could end 2014 on a strong note. Mercedes trails BMW by only 3,380 units through September in the U.S., and could again end the year as the highest-selling luxury vehicle maker in the country.

Tata Motors

On the back of strong growth for the luxury division Jaguar Land Rover, Tata Motors’ stock has surged almost 50% so far this year. The British manufacturer announced plans of further accelerating growth through higher investments and new model launches, last week. Jaguar and Land Rover’s respective unit sales jumped almost 40% and 12% last fiscal ended March, and the company expects volumes to remain strong and register double-digit growth rates following launches of the compact sedan Jaguar XE and the new Land Rover Discovery Sport in 2015. In fact, the automaker expects Europe volumes to also grow by a double-digit figure, reflecting rebounding luxury volumes in the region. ^[4]

Trefis price estimate for Tata Motors is $47.36, which is around 5% above the current market price. The stock price rose by a small 0.72% in the last week.

See Our Complete Analysis For Tata Motors

Launch of the XE is expected to be a huge boost for Jaguar in Europe, where the automaker has seen volumes fall over 12% in the five-month period through August. Jaguar Land Rover’s U.S. sales also declined 9.6% year-over-year in September, while volumes for luxury manufacturers Audi, BMW and Mercedes-Benz rose. The XE is set to be a volume model for Jaguar, which will compete with bestsellers such as BMW 3-series, Audi A3 and A4 and Mercedes-Benz C-Class in the lower-end of the premium vehicle market, which is expected to surpass 1.3 million units this year, with these three models constituting a massive 88% of the volumes. Following the launch of the XE, Jaguar could eat into the market share of these models and gain from the rising demand for compact premium sedans. In fact, Jaguar expects that 80% of the XE buyers will have to be lured-in from other brands.

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1. Audi volumes [↩]
2. Porsche volumes [↩]
3. Mercedes press release [↩]
4. JLR targets global double digit growth after new models out in 2015, wsj.com [↩]