The Week That Was: Volkswagen, Daimler and Tata Motors

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Automotive stocks continued to plunge to new lows last week. Big companies such as Volkswagen AG (OTCMKTS:VLKAY), General Motors (NYSE:GM) and Daimler AG– all saw their stock perform worse than the S&P 500 Index. Toyota Motor Corp‘s (NYSE:TM) share price also fell in the 5-day period, but performed slightly better than the broader indices. In view of the latest September sales reports from the automakers, we turn our focus to luxury volumes, and how the huge demand for these vehicles has impacted the automotive manufacturers in discussion this week.

Volkswagen

While Volkswagen is inching closer to the mammoth figure of 10 million unit sales in a single year, its stock is almost in freefall. Marred by China bans and slow activity in South America and Eastern Europe, the second largest automaker in the world, behind Toyota, delivered 5% fewer vehicles in the U.S. compared to the previous year through September, while the country’s automotive market registered a strong 5.5% growth during this period. [1] On the other hand, Volkswagen’s vehicle sales in South America and Russia, which formed almost 12.5% of the net deliveries last year, declined by double-digit percentages in the first three quarters. Could the slowdown in key markets be the reason for tepid stock activity for Volkswagen? Let’s focus on the brighter points for the company, one of them being the luxury sales surge.

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We have a $48.14 price estimate for Volkswagen AG, which is roughly 25% above the current market price. However, we are currently in the process of revising our estimates.

See Our Complete Analysis For Volkswagen AG

Volkswagen derives close to one-third of its value from luxury brands Audi, Porsche and Bentley, by our estimates. Although Audi sold fewer vehicles than both compatriots BMW and Mercedes-Benz last month, the former has closed its gap with BMW for the global luxury lead through the first three quarters, on the back of a 16% year-over-year growth in the world’s healthiest and fastest growing luxury vehicle market, China. On the other hand, Porsche, which sells mostly in North America, derived growth from rebounding Western European markets and the Asia-Pacific region through September. [2] With rejuvenated demand in Europe, where Volkswagen managed to raise year-over-year volumes by 6.4%, the automaker might make a strong case of selling 2.6 million vehicles in the last quarter, and hitting the 10 million mark this year.

One of the reasons why we stress on luxury volumes is because the high contribution of these vehicles to overall profits. Audi, Porsche and Bentley constituted 37% of the net revenues last year, but formed 62% of the net operating profits for Volkswagen. In fact, Porsche earns industry-leading profit per vehicle, almost equal to the revenue per unit for a non-luxury passenger car.

Daimler

Volumes for the luxury vehicle division Mercedes-Benz, which forms over 60% of Daimler’s valuation, have outpaced the growth in volumes for rivals BMW and Audi through September. Volumes in almost all the key markets have remained strong for Mercedes, a shot in the arm for the automaker as it looks to close-in on BMW and Audi in terms of unit sales. Mercedes’ sales in China, which formed around 17% of the net sales through September, grew by an impressive 30.5%. China is a crucial luxury vehicle market, expected to grow by at least 13% this year, and overthrow the U.S. as the largest premium vehicle market by 2016.

We have an $87 price estimate for Daimler AG, which is roughly 20% above the current market price. However, we are currently in the process of revising our estimates.

See Our Complete Analysis For Daimler AG

Daimler recently announced plans to extend partnership with the Chinese BAIC Motor, investing around $1.27 billion for localization of additional compact sedans other than the GLA in China. Both the companies will jointly invest around $5 billion through 2015 to increase automotive production in China. Local production will help Mercedes evade taxes and source material at a lower cost locally. In addition, the company could also gain from selling additional compact sedans in China, as these vehicles are typically high volume models and enjoy large popularity among millennial customers.

Tata Motors

With the locally-built Range Rover Evoque ready to start production in China, Jaguar Land Rover (JLR) will extend complete manufacture of its vehicles beyond the U.K. for the first time. Demand in China remains high, where the automaker sold 40% more vehicles through September, as compared to 2013. [3] Although this figure is still less than half the vehicles sold by Mercedes and one-fourth the volumes for Audi in China, JLR looks to quickly catch-up by expanding local production and opening over 200 dealerships in the country, up from the current figure of 150.

Trefis price estimate for Tata Motors is $47.36, which is around 5% above the current market price.

See Our Complete Analysis For Tata Motors

Although Tata Motors‘ (NYSE:TTM) stock has declined by almost 10% in the last month, it has gained 40% in the year so far. The fact that sales in Europe are picking up is good news for JLR, which sells nearly 36% of its vehicles in the region. Now the company will also look to rapidly increase China volumes as it begins selling locally-made lower priced Jaguars and Land Rovers in the country next year.

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Notes:
  1. Volkswagen September sales []
  2. Audi sales []
  3. JLR volumes []