Daimler Earnings Review: Robust Volume Growth And Rich Product Mix Boost Profitability At Mercedes

As expected, Daimler AG reported robust Q4 sales growth to wrap-up  a strong 2014, riding on record sales at the luxury vehicle division Mercedes-Benz. Revenues rose 10% year-over-year to €129.9 billion ($150 billion) in the year, and the group sold a total of 2.54 million vehicles, up 8% from 2013 levels. Mercedes, along with the vans segment, forms 62.4% of Daimler’s valuation by our estimates, and high unit sales growth of 10% and 9% at the cars and vans divisions, respectively, boosted the group’s 2014 results. While BMW and Volkswagen’s Audi still maintained their lead over Mercedes in terms of global vehicle sales in the premium market last year, Mercedes narrowed the gap with both its compatriots, increasing volume sales by 13% year-over-year. Mercedes’ gap with the worldwide sales leader BMW shrank to 91,000 unit sales from 114,000 in 2013. ^[1] Mercedes is in hot pursuit to take over the worldwide luxury sales lead before the end of this decade, and the company plans to launch at least eleven new models (with no predecessors) before 2020 as a part of its product offensive strategy. In order to stimulate additional demand this year, four new vehicles will be launched by Mercedes in the first seven months of 2015, including models from the Mercedes-Maybach brand, the sports car Mercedes AMG GT, the CLA Shooting Brake, and the sports SUV GLE Coupe.

We have an $85 price estimate for Daimler AG, which is roughly 10% below the current market price. However, we are in the process of incorporating the quarterly results into our forecasts and revising our current price estimate.

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Mercedes improved revenues by 14% last year, over 2013 levels, on a rich product mix and high volume sales. What further underscored strength in the premium vehicle division’s results was an increase in operating margins to 8.3% in Q4, from 7.5% in Q4 2013. Strong operating performance in the third and fourth quarters meant that Mercedes ended 2014 with 8% operating margins, up from 6.2% a year ago. One-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% a couple of years ago, but a favorable product mix and efficiency initiatives such as the ‘Fit for Leadership’ program has helped Mercedes sequentially improve its profitability. However, the operating performance at Mercedes still lags that of BMW and Audi, which reported margins of 10.2% and 9.7%, respectively, through the first three quarters. One of the key ploys for Mercedes to boost margin growth, apart from growing volume sales, could be by expanding its production footprint, especially in low-cost countries and countries with a fast growing luxury vehicle market, so that the cars could be built near the end customers.

Compact Models Boost Volume Growth At Mercedes

Unit sales for the A-, B-, CLA-, and GLA-Class smaller premium vehicles rose by 23% to approximately 472,000 vehicles in 2014, representing 27% of the overall volume sales. In addition, the C-Class compact saloon, the new version of which was launched last year, continued to be the top volume model for Mercedes, constituting almost one-fifth of the net volumes for the brand last year. Demand for smaller premium vehicles has remained strong in the last few months, as customers, with a higher purchasing power now owing to declining oil prices, trade-up from non-luxury large sedans. What the C-Class underscores is Mercedes’ commitment to extracting meaningful volume growth by penetrating high volume segments such as compact sedans and SUVs, and simultaneously reducing its import tariffs and cost of production by manufacturing closer to the end customer. The C-Class is Mercedes’ first model to be produced in four continents, being manufactured in Germany, South Africa, the U.S., and China. Sales for the C-Class increased by nearly 50% in December, and with full availability of the model’s new versions, Mercedes expects additional sales momentum going into 2015.

Mercedes To Revamp Its SUV Lineup In 2015

According to Daimler’s Chief Executive Officer Dieter Zetsche, Mercedes will launch four new or revamped SUVs this year, in a bid to further penetrate one of the fastest growing segments in the luxury vehicle market. Unit sales of premium SUVs rose 14.2% year-over-year in 2014 in the U.S., representing the highest growth in any vehicle segment. Premium SUVs still form only 1.2% of the country’s vehicle market, and with a growing demand for luxury vehicles, especially crossovers, this segment could continue to expand. The U.S. automotive market crossed 16.5 million volume sales last year, up 6% from 2013 levels, and on account of lower energy prices and increasing disposable incomes, automotive demand is expected to remain strong in 2015.

Mercedes renamed its M-Class model lineup the GLE-Class last year, and recently introduced the GLE Coupe, combining the looks of an SUV and a luxury coupe. Crossovers have become popular in recent years as they provide both the functionality of a utility vehicle and the comfort and design of a car. The GLE Coupe will compete with the new model year BMW X6 (launched in December) in the U.S., aiming to add incremental sales for Mercedes.

With Mercedes looking to launch new models this year, including the renewal of almost its entire range of SUVs, sales could grow at a rapid pace again for the luxury vehicle brand, and consequently Daimler, in 2015. What will be interesting to see is how the brand manages to improve its profitability, while still being committed to its product offensive strategy. Mercedes expects to significantly improve its operating profits this year. The company is extending its partnership with the Chinese BAIC Motor, to further its business in China, which overtook Germany to become the brand’s second largest market behind the U.S. The joint venture’s manufacturing plant in Beijing already produces the C-, E-, and GLK-Class models, and will now start producing the compact crossover GLA-Class this year. In addition, The Renault-Nissan Alliance and Daimler will establish a 50-50 joint venture, which will oversee construction and operations of the new manufacturing facility in Aguascalientes, Mexico. Going forward, expanding production in low-cost countries and near the end customer is expected to push margin-growth for the company.

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1. Daimler press release [↩]