Daimler Earnings Preview: Mercedes To Continue Growth Momentum Into Q2

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Daimler AG is scheduled to announce its Q2 and mid-term financial results on July 23, and our focus will rest on the performance of the company’s premium luxury vehicle brand Mercedes, which has turned up the heat on its compatriots Audi and BMW this year. [1] While sales for the global leader in premium vehicle sales BMW are up 5.1% year-over-year through the first half of the year, and that for Audi (the second highest-seller) are up only 3.8%, Mercedes has narrowed its gap with these automakers by recording a solid 14.7% increase in unit sales to 898,425 vehicles. But volume growth for Mercedes was already outpacing that of its competition last year, so what’s different this year?

This year Mercedes seems to have finally caught up with BMW and Audi in terms of profitability. And this will be a huge boost for the luxury division, which forms approximately 63% of Daimler’s valuation, according to our estimates.

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

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See Our Complete Analysis For Daimler AG

Net revenues rose 16% year-over-year to €34.24 billion (~$37.65 billion) in Q1, aided by a 15% and 18% sales growth at Mercedes-Benz and Daimler Trucks divisions. [2] In previous quarters, the strong revenue growth for Daimler didn’t reflect in its free cash flow due to the large investment expenses. 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. Operating profits rose a solid 56% year-over-year in Q1, and the German premium automaker posted 9.4% operating margins, up from 8.3% in the quarter before that, and 8% in the full year 2014.

It’s finally time for Mercedes to reap the benefits of its large investments in research and development, and expansion of production footprint. The backbone of the brand’s positive results has been its strong performance in the world’s number 1 and 2 luxury vehicle markets — the U.S. and China.

  • Mercedes Back To Top In The U.S.?

Mercedes and BMW have for years now fought for the top spot in the U.S. in terms of volume sales, and while BMW edged out Mercedes for the most sales in June, Mercedes has sold more vehicles in the country year-to-date. [3] The U.S. economy is holding well, and that has been good news for automakers in the last year or two. Although the demand for passenger cars has fallen (volume sales through June down 1.7%), the demand for SUVs/Crossovers has continued to rise in the country, with volume sales up 13% in the first half. Customers are opting for SUVs, which combine the looks of a car and the functionality and power of a utility vehicle, over sedans. Continually low oil prices have also fueled sales of SUVs and Crossovers, which are typically not big on fuel economy.

global sales volume growth

Mercedes’ light truck lineup posted an 18.5% rise through June compared to 2014 levels, reflecting the growing demand for SUVs in the U.S. market. This increase is expected to boost the brand’s top line this quarter. 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. With the GLE lineup and several all-new or revamped models hitting the U.S. market this year, Mercedes is poised to gain from the large SUV demand.

  • Mercedes Is Doing Better Than Its Competition In China

While Audi, the highest-selling premium automaker in China, has sold only 1.9% more vehicles in the country through June, Mercedes has grown its volume sales by 18% through May, and by a whopping 38.5% in June. Why we single out the performance in June is because this rise came despite the overall auto sales in China falling 3.2% last month. [4] As industry overcapacity, real estate, and infrastructure sector slowdowns, drag down economic activity in China, vehicle sales have also slowed down this year, from the previously seen high growth levels in the world’s largest automotive market. The relatively weaker economic conditions have also caught up with the ever-so-growing luxury vehicle market in the country, with the likes of Audi, BMW, and Jaguar Land Rover (JLR) feeling the heat. But not Mercedes, it seems, which continues to see growth in China.

Mercedes is now just less than 4,000 unit sales behind Audi in terms of global volume sales, and is also catching up to BMW. But what is also going well for the automaker is the improvement in profitability. In addition, while a strengthening dollar has 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 Q1, and could be accretive again this 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.

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Notes:
  1. Daimler press release []
  2. Daimler earnings release []
  3. auto sales, wsj.com []
  4. Mercedes beats Audi on sales gains in sluggish China, bloomberg.com []