Mercedes’ Strong Growth Could Give Impetus To Daimler’s Stock

Daimler AG‘s luxury vehicle division Mercedes-Benz continues to post record sales through the first half of 2016, and this could give impetus to the company’s stock, which has declined 30% since the start of the year. Mercedes-Benz forms ~60% of the company’s valuation, as per our estimates, and has crossed a million vehicle deliveries to customers since the start of year, with a 12% year-over-year growth rate. This growth has been backed by Mercedes’ strong sales in Europe and China.

In fact, Mercedes has now passed BMW as the highest-selling premium automaker in the world, for the first time since 2004. Last year, Mercedes-Benz passed Audi as the world’s second-highest selling premium automaker, behind BMW, beating the latter’s smaller 3.6% year-over-year volume growth by posting a solid 13.4% volume growth. The product offensive strategy in the last few years has worked well for the German automaker, whose operating margin declined to around 3% in the first quarter of 2013, due to one-time costs associated with the launch of new/refreshed models.

At the core of Mercedes’ strong performance this year is the growth in China.

China’s passenger-vehicle sales expanded at 9.5% to 10.8 million units through June, outpacing last year’s 8.4% gain, on the back of rising demand for SUVs and new-energy vehicles. 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, these all helped ensure that China became the automaker’s single largest market last year. In addition, another positive for Mercedes is last year’s  27% rise in sales volume of SUVs, which formed roughly 30% of the brand’s total volumes. SUVs formed 34% of Mercedes’ overall deliveries through June, rising an impressive 46% year-over-year in terms of volume sales.

SUVs accounted for 35% of China’s passenger-vehicle sales in the first six months, compared with 27% in the same period a year ago. ^[1] Growth for SUVs has been boosted by the introduction of cheaper models by local manufacturers. Nonetheless, Mercedes has also taken advantage of the growing demand for SUVs.

The passenger vehicle market in China continues to grow, with Mercedes gaining market share over the first six months of the year. Demand for premium vehicles is expected to remain strong in the country, despite fears of a slowdown in the country. 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. In addition, 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.

With growing macroeconomic uncertainty, especially with the recent UK vote to exit the European Union, European stocks have taken a hit, including Daimler’s. The company’s stock is also down on the tepid outlook for its Daimler Trucks division, due to continual headwinds in the world’s major truck markets. ^[2] 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.

However, Mercedes’ strong growth in China and the near 14% year-over-year growth in Europe through the first half of the year should instill investors’ confidence in Daimler’s underlying performance, since Mercedes forms a substantial chunk of the group’s overall value. Operating margin for Mercedes-Benz was down to 7% in Q1 2016 from 9.4% in the same period last year, affected by lifecycle-related declines in unit sales of the S- and E-Class models, which have higher price-per unit and, thus, boost profitability. Launch of the new E-Class as of April, and also the models of this year’s ‘dream-car offensive,’ such as the C-Class convertible, are expected to boost Q2 results.

Have more questions on Daimler? See the links below.

• Daimler Earnings Review: Profit Declines As Currency, Negative Mix Impact Results
• Where Will Daimler’s Revenue And Gross Profit Growth Come From Over The Next Three Years?
• What Is Daimler’s Revenue And Gross Profit Breakdown?
• By What Percentage Have Daimler’s Revenues And Gross Profit Grown Over The Last Five Years?
• What Is Daimler’s Fundamental Value Based On Expected 2016 Results?
• How Has Daimler’s Revenue And Gross Profit Composition Changed Over 2012-2016E?

Notes:

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1. China auto sales growth accelerates on rising SUV demand, bloomberg.com [↩]
2. Daimler pres release [↩]