Daimler Earnings Review: Mercedes’ Operational Performance Holds Strong Into Q3

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DAIMLER AG

Daimler AG‘s solid performance in the first half of the year has continued into the second. Revenue in Q3 increased by 13% to €37.3 billion ($41.1 billion) and EBIT from ongoing business by 31% to €3.7 billion. Both volumes and margins have expanded for Mercedes, which constitutes approximately 67% of Daimler’s valuation, according to our estimates. Mercedes has done well despite a slightly tepid macroeconomic environment. One could say that the German luxury brand is firing on all cylinders, with volumes rising strongly in all of its crucial markets — China, U.S., and Western Europe.

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

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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. Revenue from the U.S. was up almost 30% in Q3, constituting approximately 30% of Daimler’s top line, aided by the stronger dollar. For the full year, favorable exchange rates could add approximately €800 million to Daimler’s pretax profit, which is good news for shareholders, despite the fact that this number has been revised downward from the previously estimated €1 billion due to the very volatile emerging market currencies. But apart from the inorganic growth due to currency translations, the group has ended the first nine months of 2015 with strong organic growth, especially for its premium brand Mercedes-Benz, and could end 2015 strong as well.

Volume Growth Strong In Core Markets

Mercedes had the strongest quarter so far in the company’s history with unit sales rising 18% year-over-year in Q3 to 508,350 units, on the back of strong showings in both the U.S. and China — the world’s top two automotive markets, and the domestic market of Western Europe.

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 through the end of the year.

On the other hand, vehicle demand in Europe has continued to rise in Q3, with the largest year-over-year increase in passenger vehicle registrations achieved in August (11.2%). [2] European Union passenger vehicle registration, which has risen for 25 consecutive months now, is up 8.8% year-over-year through September on a significant replacement demand, strengthening labor market, and increased credit availability. Mercedes’ volume sales have grown by a solid 19% year-over-year in Q3 in Western Europe.

The surprise has been China, which has been a key growth driver for Mercedes this year, while its chief competitors have suffered due to the slower market conditions in the country. Economic conditions have become weaker in China, over previously seen high GDP growth levels, due to the fall in the stock market, industry overcapacity, and real estate and infrastructure sector slowdowns. This has caught up to the automotive industry in the country, too, with automobile production falling 0.8% year-over-year through September. [3] However, Mercedes-Benz has defied the China slowdown and posted an impressive 39% year-over-year rise in unit sales in the country through the first nine months of the year.

With a 19% increase in worldwide unit sales through the first three quarters, Mercedes has retaken the second position in the global luxury vehicle market behind BMW from Audi, which has sold only 3.8% more vehicles through September, compared to 2014 levels. With the news of the Volkswagen emissions scandal shaking the automotive industry recently, Mercedes might be a benefactor of the possible loss in customer trust in Audi, further boosting its future sales.

Operating Margins For Mercedes Are A Strong 10.4%

Driven by the high volume rise and product and price mix, Mercedes reported EBIT from ongoing business of €2.2 billion, up 38% year-over-year, and profit margins of 10.4%. 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 last quarter as well. The automaker has 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 company has caught up in terms of profitability, as well, and, in fact, has surpassed both BMW and Audi in terms of operational performance.

And growth in terms of profitability could continue, with Mercedes laying the foundation stone for its future compact-car plant in Mexico. As demand for compact luxury sedans rises around the world, Mercedes-Benz has extended its partnership with the Japanese automaker Nissan to jointly build compact luxury models in Mexico. The Renault-Nissan Alliance and Daimler will establish a 50-50 joint venture, which will oversee construction and operations of the new manufacturing facility in Aguascalientes, Mexico. With increasing disposable incomes and a rising proportion of the population upgrading to entry-level premium vehicles from their large non-luxury sedans, Mexico sales for Mercedes-Benz could rise. However, the biggest advantage for the German automaker, with respect to its Mexico plans, would be the cost-cutting benefits derived from local production in the low-cost country.

Mercedes’ strong performance through the first nine months of the year, despite continual volatility in some of the crucial emerging markets, is a testament to the brand’s solid core business.

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Notes:
  1. U.S. vehicle sales data []
  2. Vehicle sales in Europe []
  3. China automobile statistics, caam.com []