Daimler Pre-Earnings: Solid End To 2015 Expected On Strong Volume Growth And Operational Performance

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DAI
DAIMLER AG

Daimler AG is scheduled to announce Q4 and full-year results on February 4, and on the back of record years for Mercedes Cars and Vans, and slightly more sales for Daimler Trucks, despite tough macroeconomic conditions, we expect the company to announce a solid set of results. Mercedes constitutes 67% of the company’s valuation, as per our estimates, and the luxury automaker beat both its chief competitors BMW and Audi in terms of volume growth last year. The brand increased volume sales by 13.4% year-over-year to 1.87 million units last year. In fact, Mercedes has overtaken Audi as the world’s second-highest-selling luxury automaker in the world, and is closing in on BMW for the top position it lost in 2005. Not only in terms of volume performance, Mercedes has had a stellar 2015 in terms of operational performance as well.

We have a $89 price estimate for Daimler AG, which is above the current market price.

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One of the main reasons why Mercedes was able to surpass Audi in terms of volumes last year was due to its impressive 32.6% growth in sales numbers in China, which has been struggling of late to match its previously seen high GDP growth numbers. The slowdown in the infrastructure and real estate sectors in the country, and the precipitous fall in the stock market, took a toll on customer spending, and the automotive sector also slowed down during the first half of the year. However, Mercedes seemed unscathed from this trend, even while both BMW and Audi struggled to up their volume sales in China. While Audi, the largest premium automaker in China, sold 1.4% fewer vehicles in the country, compared to 2014 levels, BMW sold only 1.7% more. In fact, a massive rise in China for Mercedes due to more than 15 new or revamped models, expansion of the dealer network to approximately 500 dealerships, extension of local production capacity, where in addition to the C- and E-Class, the two SUVs GLA and GLC started to be built, all ensured that China became the automaker’s single largest market last year. In addition, what bode well for Mercedes all through last year was the 27% rise in sales volume of SUVs, which formed roughly 30% of the brand’s total volumes.

 

2015 was the year of SUVs, which, along with Crossovers grew 16.3% in the U.S., while the luxury SUV/Crossover segment grew 16.7%. Besides the large rise in the U.S., SUVs showed a massive 52.4% rise in China as well. [1] The market for luxury SUVs in China, in particular, is expected to double to 1.2 million units by 2020, further boosting growth prospects of luxury automakers in the country. Just for reference, less than 200,000 units of luxury SUVs were sold in China in 2010. Mercedes had an edge over its competitors due to its strong range of SUVs. Audi sold more SUVs than Mercedes last year, but its sales volume in this segment grew only 6%, compared to the latter’s 27% rise, as aforementioned. Mercedes has recently revamped its SUV lineup, which bodes well, since the demand for these bigger and spacious vehicles is as strong as ever. The smallest compact SUV crossover is the GLA, followed by the compact SUV GLC — a new addition.  Mercedes renamed its M-Class model lineup the GLE-Class last year, and introduced the GLE Coupe, rivaling the BMW X6.

Mercedes could continue to do well in China this year, carrying momentum from 2015. The country has showed signs of slowing down, however, but the demand for luxury goods, including automobiles, is expected to remain strong. The shift in a service-driven economy from a manufacturing driven economy will see the rise of the upper-middle class. The number of upper-middle-class and affluent households is forecast to double to 100 million and comprise 30% of all urban households by 2020, compared with 17% presently, and only 7% in 2010. This should help boost sales of premium vehicles. Consumption of young-generation consumers (ages below 35) is growing at 14% annually, which is twice that of consumers older than 35. The newer generation also typically has a more sophisticated taste, and is more free-spending. The growth in the upper-middle class and the emergence of the new generation is expected to increase sales of high-value products, including automobiles.

 

Besides China, Mercedes did well in the U.S. and Western Europe, as well. While the brand trails both Audi and BMW in China, it holds the edge over its competitors in the U.S., where it remained number one last year. On the other hand, Mercedes beat BMW’s 10.2% and Audi’s 5.4% volume growths in Western Europe, with a 12.5% growth, inching closer to its rivals in the region. Currently, the market share of Audi, BMW, and Mercedes in Western Europe’s passenger vehicle market is 5.6%, 5.5%, and 5.4%, respectively.

Apart from solid volume growth, Mercedes has caught up with its competitors in terms of profitability last year, and has, in fact, surpassed them. While large costs had kept Mercedes’ margins subdued till a couple of years back, the benefits of efficiency programs, the higher price of new models, and more volume sales, have boosted the brand’s profitability more recently. Mercedes reported EBIT from ongoing business of €2.2 billion in Q3, up 38% year-over-year, and profit margins of 10.4%. High demand for the luxury automaker, and favorable pricing, should boost profitability in the last quarter, as well. In fact, Mercedes’ 10.2% operating margins for Q1-Q3 2015 are more than Audi’s 9.2% and BMW’s 9% reported operating margins during the same period.

On the back of strong volume growth for Mercedes, a 9% increase in volume sales for Mercedes Vans, and slightly more unit sales for Daimler Trucks, despite continually weak demand in Latin America, we expect Daimler to cap off 2015 with solid results.

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Notes:
  1. passenger vehicle stats, caam.org []