The Month That Was: Automotive Stocks


This month we will discuss luxury volume sales for leading automakers Volkswagen AG (OTCMKTS:VLKAY), Daimler AG‘s Mercedes-Benz, and Tata Motors‘s (NYSE:TTM) Jaguar Land Rover. Global vehicle sales are expected to grow around 3% this year, but luxury volume sales are expected to continue to outpace growth in the global light-duty vehicle market, fueling growth for premium automakers. In particular, we will discuss the dynamics in the world’s two largest luxury vehicle markets–the U.S. and China.

Biggest Winner- In the last month, all three stocks have declined, while the overall S&P 500 Index rose by a small 0.3%. Daimler’s stock took the mildest hit, declining by 2.14%, while Tata’s stock took the biggest hit, falling by 10%.

Volkswagen

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Volkswagen has been struggling lately, with vehicle deliveries up only 1% year-over-year through April. This is mainly as the company’s namesake passenger vehicle brand continues to report declining sales. This division forms 60% of the net volumes for the company, and due to poor customer perception in the U.S., and a relatively weak SUVs/Crossover lineup, Volkswagen Passenger Vehicles has witnessed tepid sales in both the U.S. and China. What has kept Volkswagen’s volume sales positive is mainly the large demand for premium brands Audi, Porsche, and Bentley.

We have a $52 price estimate for Volkswagen AG, which is above the current market price.

See Our Complete Analysis For Volkswagen AG

Audi sales rose 5.2% through April, mainly on the 12% and 5.2% rise in sales in the U.S. and China, respectively. An upbeat economic environment in the U.S., historically low unemployment rates, and low crude prices, have influenced consumer behavior, prompting a shift to larger and luxury vehicles. Sales growth in the luxury SUV segment has outpaced every other segment in the U.S. this year, growing by 30.4% year-over-year through April. On the other hand, even though China’s light-duty vehicle market is going through a slowdown of sorts, premium sales remain strong as consumers flush with cash switch from large sedans to entry-level or compact premium cars or SUVs. Why premium brands are significant for Volkswagen is because they have higher average revenue per unit and operate at higher margins, boosting overall profitability. Volkswagen’s namesake brand has 2% operating margin currently, which is dragging down margins for the overall company. Audi and Porsche have operating margins of 10-15%, which pushed the group’s profitability to 6.2% last quarter. However, Volkswagen still lags the 9-10% margins reported by Toyota.

Daimler

Mercedes remained a close second to BMW in terms of volume sales in the U.S. in Q1, growing vehicle deliveries by 7.6% year-over-year in the first three months. In April, Mercedes grew sales by a further 11.3%.

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

See Our Complete Analysis For Daimler AG

Strong growth for Mercedes has come on high sales for compact models and SUVs/crossovers. The year-over-year increase in the first quarter, for Mercedes’ net SUV sales, was a strong 32%, to form approximately one-fourth of the net volume sales for the brand. Premium SUVs still form only 1.3% of the U.S. vehicle market, and with 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 recently. Crossovers have become popular in recent years as they provide both the functionality of a utility vehicle and comfort and design of a car. The GLE Coupe will compete with the new model year BMW X6 (launched in December) in the U.S., aiming to add incremental sales for Mercedes.

Tata Motors

Tata Motors announced its fiscal 2015 (ended March) results this week, and the stock fell 4.2% just after the announcement of the results. Sales of passenger vehicles surged 9.9% year-over-year in 2014 to 19.7 million units in China, and retail sales for JLR surged 28% year-over-year in the country during this period. However, since then, demand for the British luxury vehicle brand has been tepid in the country, with volumes down more than 20% in the January-March quarter, and further fell 21% in April. Jaguar Land Rover is rolling out its locally built Range Rover Evoque in China, but is facing some trouble scaling-up its output. Sales in China might have dropped this year mainly as Chinese customers decided to wait for the locally-built cheaper JLR models, or might be due to the measures taken by the government to make domestic automakers more attractive, such as encouraging parallel imports of premium vehicles and gray-market vehicles, not authorized by the automakers, which are sold below the official market price. [1]

Trefis’ price estimate for Tata Motors is $43, which is above the current market price.

See Our Complete Analysis For Tata Motors

China is key to JLR’s growth prospects and is the single largest market for the company. This fiscal onward it will be interesting to see if JLR is able to deliver quality and get back on track, especially in China.

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Notes:
  1. China rethinks its car-sales model []