Daimler Pre-Earnings: Strong Volume Rise In U.S. And China To Fuel Top Line Growth

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Daimler AG is scheduled to announce its Q1 results on April 28. The company’s luxury vehicle division Mercedes-Benz (including vans) forms approximately 70% of the net valuation for Daimler, according to our estimates, and on the back of record sales for this division, we expect a strong top line growth this quarter. Mercedes is presently third behind BMW and Audi in the race for the global premium vehicle sales lead, after losing its lead to BMW in 2005, but has been closing in on its compatriots in the last year or two. In Q1, Mercedes’ volume sales rose an impressive 14.8% year-over-year to 429,602 units, outpacing the growth of 5.4% and 6.1% at BMW and Audi respectively. Strong performance in North America, on the back of improving economic conditions in the U.S., and continual sales growth momentum in China, fueled a solid volume sales rise for Mercedes this quarter, which should also bolster top line growth.

Apart from a strong volume rise, profitability is expected to improve at Mercedes-Benz this quarter. High investments in manufacturing facilities, product development, and model makeovers hurt the company’s margins previously, but the time may have come when Mercedes starts reaping the benefits of its large investments. 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 9-10% operating margins.

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

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See Our Complete Analysis For Daimler AG

Strong North America Volume Growth Should Translate Into Higher Sales

Improving economic environment in the country, fueled by low oil prices, increasing customer purchasing power, and historically-low unemployment rates, have impacted automotive demand positively. 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. [1] Low crude prices influence consumer behavior, prompting a shift to larger and luxury vehicles, which bodes well for Mercedes, which grew volume sales by 8.4% year-over-year in Q1 in the U.S.– it’s single largest market.

The strong growth for Mercedes has come on the back of high sales for the compact models and SUVs/crossovers.  The year-over-year increase in the first quarter, for Mercedes’ net SUV sales, was a strong  32%, to form approximately one-fourth of the net volume sales for the brand. Premium SUVs still form only 1.3% of the U.S. vehicle market, and with a growing demand for luxury vehicles, especially crossovers, this segment could continue to expand. Mercedes renamed its M-Class model lineup the GLE-Class last year, and the GLE Coupe, combining the looks of an SUV and a luxury coupe, went into production at Mercedes’ Tuscaloosa plant recently. 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. On the other hand, sales of compact cars, comprising A-/B-/CLA-/GLA-Class, has increased 25.3% year-over-year.

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 over 25% of the net volumes for the brand in the last three months. 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 58% in the first quarter, and with full availability of the model’s new versions (sedan and estate), Mercedes expects additional sales momentum going forward.

Mercedes’ China Sales Grow By More Than Expected

The world’s largest automotive market, China, has undergone a slowdown of sorts, hurt by weaker economic activity and industry overcapacity. In the first three months, although automobile sales in the country was up 3.9%, this growth rate was 5.3 percentage points lower than the previous year. [2] Nonetheless, Mercedes’ sales in China remained strong, rising by 16.6% year-over-year to over 78,000 units. Mercedes also 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.

The company will launch four new or revamped SUVs this year, and will also start producing the compact crossover GLA-Class in China. Production of utility vehicles increased by an impressive 36.7% to 4.32 million units in China last year, and could top 7 million units by 2018, according to IHS Automotive. Passenger vehicle sales rose 12% in China in March, fueled by a large 64% increase in SUV sales. [3] High demand for SUVs in China bodes well for Mercedes, which is expanding its SUV/crossover lineup in the country.

On the other hand, the resurrected Mercedes-Maybach brand is expected to fuel growth in average prices. The brand launched first in China this year, with the S400 and S600 models launching there in February. The models are priced at more than 2x their prices in the U.S., mainly because of the high import tariffs and transportation expenses. However, foreign automakers do tend to scale-up the prices of their products in China, where demand for luxury vehicles and world-renowned brands remains high. Mercedes responded to China’s anti-trust probe last year by cutting down price of auto parts by 15-30%, but China’s antitrust regulator recently fined the luxury brand $57 million for unjustly and highly inflated vehicle and spare part prices. Local production and scaling-back product prices in China will lower the average pricing for Mercedes, but incremental sales from super-luxury models such as the Mercedes-Maybach lineup could somewhat offset this decline going forward.

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Notes:
  1. Auto sales U.S. []
  2. China vehicle sales and production in Q1 []
  3. China auto sales rise 12% in March on surging SUV sales []