Daimler Pre-Earnings: Mercedes To Witness Solid Growth On Large Volume Sales

Daimler AG is scheduled to report its Q3 results on October 22, and this quarter could be a testament to how Mercedes-Benz has been performing remarkably all through the year. Both volumes and margins have expanded for Mercedes, which constitutes approximately 67% of Daimler’s valuation, according to our estimates.

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 $91 price estimate for Daimler AG, which is above the current market price.

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Mercedes had the strongest quarter so far in the company’s history with unit sales rising 16.1% year-over-year in Q3 to 477,999 units, on the back of strong showings in both the U.S. and China — the world’s top two automotive markets. While economic conditions have been on the positive side in the U.S., China has been coming to terms with normalization, which has negatively impacted sales for various foreign automaker such as Volkswagen. However, China seems to be kinder to Mercedes-Benz.

Mercedes-Benz Holds Strong In Both The U.S. And China

Amid concerns of softer global economic growth, the U.S. automotive market continues to record solid growth led by the sustained high demand for SUVs/Crossovers. The country’s light-duty vehicle market rose 5% year-over-year through September, but while car sales have declined by more than 2%, light-truck sales have risen 11.7%. ^[1]

Mercedes-Benz has seen U.S. volumes rise 7.6% through September, owing to the large 18.6% rise in light-truck volumes. 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.

On the other hand, while Audi and BMW — the leading premium automakers in China — witnessed profit declines in China in Q2, Mercedes has remained steady on its growth path in the country. Mercedes-Benz has defied the China slowdown and posted an impressive 31% year-over-year rise in deliveries in the country through the first nine months of the year.

China has been a key growth driver for Mercedes this year, while its chief competitors have suffered. BMW’s joint venture in China contributed €156 million ($177 million) to the group’s earnings in Q2, down 22.8% year-over-year. Operating margins fell to 8.4% in the last quarter for BMW, lower than the previously achieved 9-10% margins, and much lower than Mercedes’ 10.5% operating margins. The tough pricing environment in China forced the automaker to lower its prices, impacting net profits, even as revenue growth remained strong. On the other hand, net profit for Volkswagen, which owns Audi, declined to €2.67 billion ($2.95 billion) in Q2, impacted by the weakness in China — its single largest market. Although Audi’s margins remained solid at 9.7%, this figure doesn’t include the China business, which is recorded in the financials using the equity method of accounting.

We expect another strong quarter for Mercedes-Benz and Daimler, on the back of the strong showing in key markets, despite macroeconomic volatility. The automaker has also made a comeback this year in terms of profitability. 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%. 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. High demand for the luxury automaker, and favorable pricing, should boost profitability in the third quarter as well.

See the links below for more information and analysis:

• Mercedes-Benz is catching up with competition in China
• Who will gain most from the large SUV/Crossover demand in the U.S.?
• Trefis analysis: Mercedes-Benz Cars and Vans Revenues
• Trefis analysis: Daimler North America Revenues
• Trefis analysis: Daimler International Revenues

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1. U.S. vehicle sales data [↩]