Daimler Earnings Review: Net Profits Almost Double On A Strong Operating Performance

As expected, Daimler AG reported a strong set of Q1 results on April 28, fueled by higher sales at the luxury vehicle division Mercedes-Benz (including vans), which forms approximately 70% of the net valuation for the group, according to our estimates. Net revenues rose 16% year-over-year to €34.24 billion (~$37.65 billion), aided by a 15% and 18% sales growth at Mercedes-Benz and Daimler Trucks divisions. ^[1] This strong growth for the German automaker reflects a solid performance in the U.S. — the company’s single largest market. Net sales from the country rose an impressive 29% over the year ago period, helped by the strengthening U.S. dollar, but mostly because of the growing vehicle demand in the country. Mercedes also gained on an impressive volume sales growth in China, despite slowing vehicle demand in the country this year, compared to previous years’ levels.

We have a $96 price estimate for Daimler AG, which is in line with the current market price. However, we are currently in the process of incorporating the recent quarterly results into our forecasts, and revising our price estimate.

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What was a big win for Mercedes-Benz division in the first quarter was a solid 56% year-over-year rise in operating profits. The German premium automaker, which lagged both BMW and Audi in terms of volume sales and profitability, caught up with its compatriots, posting 9.4% operating margins in Q1, up from 8.3% in the last quarter, and 8% in the full year 2014. It seems like the time has come for Mercedes to reap the benefits of its high investments in manufacturing facilities, product development, and model makeovers, which previously hurt the company’s margins.

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 operating margins, which are now at par with the figures reported by Audi and BMW. High volume sales have played a big part in improving Mercedes’ profitability, and in the first quarter, the manufacturer closed its gap with both Audi and BMW in terms of volume sales as well. 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. In addition, while a strengthening dollar and weakening local currencies in certain emerging markets, have been a downer recently for large companies that realize their revenues in U.S. dollars, positive currency translations for Daimler expanded net revenues by 7 percentage points in the first quarter. For the full year, favorable exchange rates could add approximately €1 billion to Daimler’s pretax profit, which is more good news for shareholders.

Net profit nearly doubled this quarter from a year ago period, rising to €1.96 billion (~$2.13 billion) from €1.03 billion in Q1 2014, beating analysts’ consensus estimate of a €1.61 billion net profit. ^[2] Daimler is expected to outpace the growth in the global automotive market, and with improving operational efficiency at Mercedes-Benz and the Trucks divisions, this solid Q1 growth might not be a one-off. Earnings per share almost doubled this quarter, over a year ago period, dividend payment rose 9% year-over-year, and shareholder return could keep on increasing going forward. Analysts expect earnings per share to grow by around 17-18% this year, from €6.08 last year.

Strong U.S. And China Sales Boost Top Line Growth

Mercedes remained a close second to BMW in terms of volume sales in the U.S. in Q1, growing vehicle deliveries by 7.6% year-over-year in the first three months. 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. ^[3] Low crude prices influence consumer behavior, prompting a shift to larger and luxury vehicles, which bodes well for Mercedes going forward.

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, Mercedes is also responding well to the rising demand for SUVs in the world’s largest automotive market, China. 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. ^[4]

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 were up 3.9%, this growth rate was 5.3 percentage points lower than the previous year. ^[5] 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.

Mercedes is outpacing the overall volume growth in key automotive markets around the world. Higher volume sales, positive price and product mix, and improving operational efficiency, could continue to boost the company’s performance in the subsequent quarters.

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1. Daimler earnings release [↩]
2. Daimler profit jumps on 16% sales gain, wsj.com [↩]
3. Auto sales U.S. [↩]
4. China auto sales rise 12% in March on surging SUV sales [↩]
5. China vehicle sales and production in Q1 [↩]