Daimler’s Mercedes Ends The First Half With Solid Growth In Operating Profits

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Daimler AG announced solid Q2 and mid-term results last week, with wins across its luxury vehicles and medium and heavy commercial vehicles portfolios. Revenues rose 19% year-over-year in Q2 on a 14% increase in unit sales. While negative currency translations have dragged down the financials of companies, especially those based out of the U.S., Daimler is set to benefit from the strengthening dollar, and other foreign currencies, against the euro. For the full year, favorable exchange rates could add approximately €1 billion to Daimler’s pretax profit, which is good news for shareholders. But apart from the inorganic growth due to currency translations, the group has ended the first half of 2015 with strong organic growth, especially for its premium brand Mercedes-Benz.

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

See Our Complete Analysis For Daimler AG

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

 

Mercedes forms approximately 63% of Daimler’s valuation, according to our estimates. The luxury brand lags both BMW and Volkswagen’s Audi in terms of global vehicle sales, but has slowly but surely narrowed its gap with both its compatriots in the last year or two. 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’ volume sales are up a solid 14.7% to 898,425 vehicles. In fact, Mercedes is now only less than 4,000 units behind Audi in the race for the second highest-selling premium automaker in the world. However, improving volume sales is not the focal point of our discussion, the turnaround in profitability is.

Mercedes was already catching up with BMW and Audi in terms of volumes, but this year the German number three has caught up in terms of profitability as well. With a 19% rise in revenues in Q2, over the previous year, and a whopping 58% rise in operating profits, the brand’s EBIT margins have reached 10.5%– higher than that at Audi presently. The company has recuperated well after one-time costs associated with the launch of new/refreshed models had lowered operating margins to around 3% in the first quarter of 2013. The strong revenue growth for Daimler didn’t reflect in its free cash flow due to the large investment expenses. However, a solid rise in vehicle sales, favorable product mix, and efficiency initiatives such as the ‘Fit for Leadership’ program have helped Mercedes sequentially improve its operating margins, from 8% in 2014, to 9.4% in Q1, and 10.5% now.

Higher unit sales have been a major boost to Mercedes’ profit growth. The brand has been firing on all cylinders–unit sales in the domestic market are back to growth, U.S growth is strong — also helpful because of the positive currency translations —  and growth in China also remains solid despite slowing market conditions.

  • Europe-

Vehicle demand in Europe has continued to rise in Q2, with the largest year-over-year increase in passenger vehicle registrations achieved in June (14.6%). [1] European Union passenger vehicle registration, which has risen for 22 consecutive months now, is up 8.2% year-over-year through June. Mercedes has outpaced the growth seen by its chief competitors in Western Europe, growing passenger car registrations by 10.5% through June, compared to the 4% and 7.3% growth for Audi and BMW, respectively.

passenger car registrations-Europe

Source: European Automobile Manufacturers Association

  • United States-

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. [2] 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.

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. 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, going forward.

  • 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. [3] 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’ strong growth in crucial markets, and solid operational return on sales, reflects how the automaker is now finally reaping the benefits of its large investments in research and development of products, and the expansion of its production footprint.

See the links below for more information and analysis:

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

 

Notes:
  1. Vehicle sales in Europe []
  2. auto sales, wsj.com []
  3. Mercedes beats Audi on sales gains in sluggish China, bloomberg.com []