These Three Scenarios Could Significantly Impact Daimler’s Valuation

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Daimler AG is the world’s third largest automaker in terms of volume sales, behind Toyota Motors (NYSE:TM), and Volkswagen AG (OTCMKTS:VLKAY). The most significant division for the company is Mercedes-Benz, which forms approximately 63% of Daimler’s valuation, according to our estimates. Deviations from our current forecasts for long-term revenues and margins for Mercedes will have a significant impact on the group’s valuation. A number of factors could cause these deviations, some of which are macroeconomic in nature, while some are specific to the automotive industry and Mercedes-Benz.

We have a $96 price estimate for Daimler AG, which is slightly above the current market price.

See Our Complete Analysis For Daimler AG

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

Here are three scenarios that could significantly impact Daimler’s valuation-

  • Mercedes-Benz Reaches 10% Operating Margins In The Mid Term- (~10% Upside)

Mercedes has narrowed its gap with both BMW and Audi in the last couple of years, mainly on the back of aggressive model makeovers and capacity additions, which helped in removing supply constraints. One-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013, but a favorable product mix and efficiency initiatives such as the ‘Fit for Leadership’ program has helped Mercedes sequentially improve its profitability. Mercedes improved operating margins to 8.3% in Q4 and 8% in the full year 2014, up from 7.5% in Q4 and 6.2% in the full year 2013. 8% might be a small figure in comparison with the figures reported by BMW and Audi, but Mercedes is slowly but surely getting closer to its near to mid term target of 10% operating margins.

Our forecasts already incorporate an estimated increase in operating margins for Mercedes, but the automaker might reach its targets sooner, especially due to its expanding manufacturing footprint nearer to the end customer and in low-cost countries. The highest selling model for Mercedes, the C-Class, is the German automaker’s first model to be produced in four continents, being manufactured in Germany, South Africa, the U.S., and China.

Mercedes recently inaugurated its compact car plant in China, which presently accounts for 15-17% of the net volume sales for the luxury vehicle brand, at the company’s local production joint venture Beijing Benz Automotive Corporation (BBAC). This will boost BBAC’s net production capacity to about 250,000 passenger cars by the end of this year. In addition, the Renault-Nissan Alliance and Daimler are establishing a 50-50 joint venture in Mexico, which will oversee construction and operations of the new manufacturing facility in Aguascalientes. The plant will start production of Nissan’s Infiniti line of premium vehicles in 2017, with production of Mercedes-Benz vehicles set to begin in the plant in the following year. Operations in China and Mexico are testament to Mercedes’ commitment to expanding its production base in low-cost countries and near the end customer, which should reduce transportation costs and tariffs, and make the company more price competitive.

Our assumptions for this scenario include-

Selling, general, and administrative expenses for the automotive division fall to 10.5% of the net revenues by the end of our forecast period, on account of increased operational efficiencies at Mercedes. We currently estimate the figure to reach 11.1% of the net sales by 2022.

Research and development costs for the automotive division decline to 4% of the net sales in the near term and increase to only 4.1% after this decade. Our forecasts and scenarios can be viewed, and further tampered with, on the Trefis website.

In this scenario, the price estimate for Daimler will increase by 10% from our base estimate, which is already 4% above the current market price.

Oil prices declined by over 50% through last year, and hover around $58 per barrel for the Brent presently. Continual slowdown in crude prices has bolstered customer purchasing power, particularly in low fuel-tax markets such as the U.S.  This, in turn, has boosted vehicle sales in the country, which witnessed its largest automotive demand since 2006 last year. Auto sales in the U.S. continue to grow this year as well, rising by 5.6% in the first three months. Low crude prices influence consumer behavior, prompting a shift to larger and luxury vehicles, which aren’t big on fuel economy. This should have a significant impact on sales for Mercedes-Benz. The U.S. is the largest market for Mercedes-Benz, and the brand sold 330,391 units in the country last year, up 6% year-over-year.

If the Organization of Petroleum Exporting Countries (OPEC) maintains its current stance and doesn’t decide to cut production, and/or demand for oil remains somewhat subdued due to weaker economic conditions in China — the world’s second largest oil consumer and the main driver of demand growth over the last few years — there might not be a significant rise in crude prices in the near term. The short-term impact of low oil prices is expected to increase sales of large and premium vehicles, which is a boon for Mercedes. Following the recession, cumulative global light-vehicle sales of over 760 million between 2014-2021 were expected, up 33% over the previous eight-year period. [1] According to IHS Automotive, another 5-7 million units could be added to this forecast due to low oil prices. To summarize, consistently low crude prices are expected to impact global vehicle volumes, as well as prompt segment shifts, which bodes well for Mercedes.

If annual unit sales for the Mercedes-Benz division (which also includes vans) reaches 3 million by 2022, up from the currently estimated 2.68 million, and volumes for the higher-priced S-/CL-/SL-Class/SLS/Maybach models reaches 200,000 units, up from currently estimated 158,000 units, Daimler’s price estimate increases to $104.05, 12% above the current market price.

In 2014, worldwide vehicle production rose 3.4%, and could grow again by a similar percentage this year. However, the rise last year was bolstered by an increase in demand in mature markets, as the U.S. witnessed the largest automotive demand since 2006, and Europe returned to positive growth. However, vehicle ownership rates in developed markets is already relatively high and the proportion of premium vehicle sales remains somewhat constant, and once the automotive industries in these countries replenish sales lost during the recession and weak economic conditions, vehicle production in North America and Europe could return to a more normalized figure.

In this scenario, automakers will look for growth in emerging markets. However, the increased volatility in some of the economies, such as Russia and Brazil, poses a threat to sales. In addition, although vehicle sales in China are expected to continue growing by a mid to high single-digit percentage in the near term, demand in the world’s largest automotive market has slowed down from previously seen high growth levels. This could hurt volume sales for Mercedes, which is the highest-selling premium automaker in Russia, and sold 30% of its net volumes in Asia-Pacific last year.

This scenario will also impact sales for the Daimler International division, which includes trucks and buses sold outside North America, and forms 13% of the net valuation for the group, by our estimates. Our assumptions for this case can be viewed on the Trefis website, including a decline in long-term volume sales for the Mercedes-Benz, S-/CL-/SL-Class/SLS/Maybach and Daimler International divisions. The price estimate for Daimler in this scenario will decline by 10% from our current base estimate to $86.26.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Low oil prices: Boom or doom for the global auto industry? []