Strong Benzo Sales Help Daimler Roll To $61

August’s numbers came in for Mercedes-Benz, owned by Daimler AG (NYSE:DAI), and the automaker continued on its strong momentum with vehicles sales rising 11.6% in the U.S. Overall, Daimler’s vehicle sales in the U.S. are up 14.5% in the first eight months of the year. ^[1] The stock is generally down since the start of the year but up 10% in the last three months as its second quarter earnings impressed investors. Mercedes-Benz was the biggest luxury automaker in the world until 2005, but currently trails BMW and Volkswagen’s Audi. Daimler AG’s revival strategy focuses on a two pronged strategy; the first targeting top line growth and the other emphasizing on widening the margins.

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Revenue Growth Crucial

Reinvigorating its existing line-up to give it a newer, fresher look will be pivotal to sustain top-line growth. Mercedes has already launched a new version of A-class earlier in the year in order to appeal to the younger generation, who prefer sportier and compact cars. The next generation C-Class should arrive in 2014 as well. Furthermore, Mercedes will launch 10 new vehicles by 2015 which will widen its portfolio to include a greater variety of compacts, coupés and SUVs.

While new models accounted for 90%  and 115% of the incremental sales for BMW and Audi respectively in the last three years, they only accounted for 15% of Mercedes’s incremental sales. ^[2] And therefore the automaker has stepped up its spending on R&D significantly with the total expense expected to be around $14 billion for 2012 and 2013 combined.

Widening Margins

While Mercedes trails BMW and Audi in terms of the number of cars sold, it also trails them in margins. Daimler’s operating margins in the second quarter were 8.6% compared to 11.6% for BMW and 11.5% for Audi. Margin improvement has been one of the priorities for Mercedes-Benz. ^[3]

Mercedes plans to produce a greater proportion of its cars from low cost manufacturing hubs such as Hungary. Hourly labor wages in Hungary are one-fifth those in Germany and one-third those in the U.S. Overall, manufacturing costs are about 30% lower than that in Germany. The automaker built a $1 billion plant in the country which began production in March this year. The plant primarily produces its B-class compact sedans and Mercedes reportedly plans to double the production of the plant in the next three years.

Mercedes-Benz could also be building passenger cars with its partners Renault and Nissan. The three companies formed an alliance back in 2010. The deal could see the alliance manufacturing an off-road vehicle for Mercedes and cars for Nissan’s luxury brand, Infiniti. Rising costs and a weak macro economic environment have forced automakers to make alliances in order to share costs and technologies.

In India, Mercedes also plans to assemble its SUVs,G class and M class, locally which would help the automaker bypass the high import duties and thus price its vehicles competitively. So, we see Mercedes taking significant steps to improve its margins. Top line growth combined with widening margins would ensure much better cash flows for the company which could escalate the stock price higher.

We have a price estimate of $61 for Daimler’s stock, which is about 20% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Auto Sales, September 4, 2012, wsj.com [↩]
2. Mercedes plans a route out of troubles, August 31, 2012, ft.com [↩]
3. UPDATE 1-Daimler may build Mercedes cars with Renault -report, August 23, 2012, reuters.com [↩]