Daimler Ends 2015 On A Solid Note, But Releases Cautious Outlook For 2016

DAI: DAIMLER AG logo
DAI
DAIMLER AG

Strong vehicle demand in the U.S. and Europe throughout last year, and a spurt in demand in the latter half of the year in China, helped boost German automaker Daimler AG‘s 2015 financials. The company reported a strong 15% year-over-year rise in revenue to near 150 billion euros ($167.25 billion) in 2015, bolstered by a 14% rise in revenue for the luxury car division Mercedes, which formed 56% of the net sales, and a 16% rise in sales for Daimler Trucks, which is impressive as this growth came despite the continued volatility in Latin America. [1] Mercedes Cars, along with Mercedes Vans, form over 73% of Daimler’s valuation (also including S-/CL-/SL-Class/Maybach), as per our estimates, and as luxury vehicle demand remained strong globally throughout 2015, Mercedes was able to sell a record 2 million units (figure includes sales of Smart), up 16% year-over-year.

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However, despite record sales for Daimler in 2015, the stock dropped 5% just after the announcement of the company’s Q4 and full-year results on February 4. This was because of the company’s slightly subdued growth outlook for this year. Daimler still expects both revenue and EBIT to grow this year, but the growth rate is expected to slow down from the high levels seen in the last couple of years. EBIT for 2016 is expected to see only a modest rise. Daimler is looking to continue to invest heavily in products and technology, which is why free cash flow this year is expected to “significantly” decrease from last year’s figure of 5.9 billion euros ($6.6 billion). The company is looking to increase its CapEx and research and development expenses for the next couple of years, which will negatively impact cash flow.

While this outlook left investors disappointed, Daimler’s record year ensured more cash for its investors and employees. The company remains committed to a 40% dividend payout ratio, and raised its dividend to 3.25 euros ($3.60) per share, from 2.45 euros. Daimler will also pay profit-sharing of 5,650 euros ($6,215), up 23% year-over-year, for each of the 125,000 eligible workers in Germany. [2]

Mercedes had a record year on the back of a 13.4% year-over-year rise in unit sales to 1.87 million units. 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. 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 8.34 billion euros ($9.34 billion) in 2015, up an impressive 40% year-over-year, and operating profit margins of 10%. This is estimated to be more than rivals BMW and Audi’s full-year EBIT margins, as the two brands are expected to be negatively impacted by lower than expected 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. One of the main reasons why Mercedes was able to surpass Audi in terms of volumes globally last year was due to its impressive 32.6% growth in sales numbers in China.

China 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. 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.

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.

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. Mercedes has recently revamped its SUV lineup, which bodes well, since the demand for these bigger and more spacious vehicles is as strong as ever.

What fuels Daimler’s slightly subdued outlook is the slowdown in growth rates expected in developed markets.  The U.S. and Europe have witnessed sharp rises in vehicle demand in the last couple of years, boosted by the refill in fleet following the slowdown in demand during the double-dip recession. But this growth is estimated to slow down going forward. These markets already have high vehicle ownership rates (number of vehicles per 1,000 individuals), and vehicle sales growth is expected to now sequentially slow down. In addition, Daimler will continue to invest heavily in its products, capacity, and technology, which will pressure cash flow. However, the company has had a strong last couple of years, and is expected to ride this momentum into 2016 as well, even though revenue and EBIT growth rates might be lower than 2015 levels. Luxury vehicle demand continues to grow, especially in emerging markets, which should boost Mercedes’ sales this year.

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Notes:
  1. Daimler earnings release []
  2. Daimler pays bigger bonuses, dividend after record year, finance.yahoo.com []