Mercedes Has Upside Potential Even As It Trails BMW And Audi

Whatever Mercedes does, BMW and Audi seem to be doing better. Mercedes-Benz, owned by Daimler AG (NYSE:DAI), was the biggest luxury automaker in the world until 2005, but currently trails BMW and Volkswagen’s Audi. The automaker signaled its intent to regain the title of the world’s largest automaker but BMW and Audi have only extended their lead this year.

Take November, for instance. Its global sales rose 5.7% to 120,346 units helped by strong North American sales. ^[1] However, they were again overshadowed by BMW and Audi whose sales stood at 145,452  and 123,600 vehicles respectively.

Its American sales grew 13 percent to 30,315 units in November helped by the E-class sedan but were beat by BMW’s 31,213 vehicles. Mercedes-Benz has so far been the leading luxury automaker in the U.S. in 2012 but BMW has been breathing down its neck and inching ever closer. The former leads the latter by just 1849 vehicles now and their respective positions could reverse in the last month of the year.

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Even in China where you expect the non-Japanese automakers to benefit from the recent anti-Japanese backlash, Mercedes’ sales tumbled 6.6% to 16,876 units. BMW and Audi, on the other hand, posted sales growths of 62% and 25.9% respectively. ^[2]

However, There Is Hope

One of the reasons why BMW and Audi continue to outsell Mercedes is because the automaker has one of the oldest portfolios. While new models have 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. 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. ^[3]

Its new A-class, launched in September, is already doing very well with the model’s bookings having already exceeded 90,000 units. Mercedes does not reveal the sales of A-class separately each month but the combined sales of A-class and B-class surged 38% in November. Furthermore, the new model is yet to be launched in several key markets such as China and India. So, the next year could be huge for the model as it will reveal the true selling potential of the vehicle. ^[4]

Mercedes-Benz will also be looking to bolster its American sales in 2013 as the automaker looks to roll out the new CLA 2014 during the next year’s Superbowl ad campaign. The four-door CLA, slotted below the C-class, will be company’s entry-level model in the United States. It will be priced around $30,000. The next generation C-Class should arrive in 2014 as well. ^[5]

In total, Mercedes will launch 10 new vehicles by 2015 which will widen its portfolio to include a greater variety of compacts, coupés and SUVs.  Even though it looks like Mercedes will not be overtaking BMW or even Audi any time soon, there is still an opportunity for upside as the new models could potentially help accelerate the sales growth.

Margins could also benefit as the additional top-line helps spread out the fixed costs over a bigger base. Moreover, a greater proportion of the automaker’s vehicles will be manufactured in its Hungarian plant, the low-cost hub, so we could see a rise in the margins.

We have a price estimate of $56 for Daimler’s stock, which is about 20% above the current market price.

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1. Mercedes’s 2012 U.S. Luxury Lead Narrows After BMW Gain, December 4, 2012, bloomberg.com [↩]
2. BMW Group Sales Climb 23.0% in November, December 10, 2012, newswire.ca [↩]
3. Mercedes plans a route out of troubles, August 31, 2012, ft.com [↩]
4. Mercedes-Benz Canada reports strong sales performance in November, December 3, 2012, newswire.ca [↩]
5. Mercedes-Benz eyes big score with new car ad in Super Bowl 2013, December 7, 2012, chicagotribune.com [↩]