Daimler has been making Mercedes cars for over a century and was there at the birth of the motor car. During the past decade, however, it has been left behind by its fast-growing, dynamic rival, BMW, and that's reflected in its share price. Now, an ambitious plan to restore the glory days is in place, which should close the gap and put some spark back into the shares.
- Record car sales at Mercedes-Benz
- Massive potential in China
- Improving product cycle
- Truck unit growing fast
- Costs still rising fast
- Restructuring could be too ambitious
Of course, Daimler doesn't just make cars. It's Europe's biggest automotive company and the world's largest maker of commercial vehicles - trucks, vans and buses. Yet, it's the underperforming car division that gets the headlines. Years spent comfortably outselling competitors came to an end in 2005; annually, Mercedes Car Group (MCG) now sells 300,000 vehicles less than BMW. In 2000, it was the other way around.
The Stuttgart-based company may have sold over 2m vehicles last year, 11 per cent more than in 2010, but the car group's profit margins continued to lag competitors by miles. MCG sold a record 1.4m cars, driving a 7 per cent increase in revenue to €57.4bn (£47.3bn) and double-digit growth in operating profit to €5.2bn. Yet operating margins of just 9 per cent were almost 3 percentage points less than BMW and even further behind Audi's 12.1 per cent. What's more, an operating profit of around €4,000 a car was 14 per cent less than BMW - despite a higher average selling price.
Analysts at investment bank Goldman Sachs blame inferior volume growth. Fixed costs, such as research and development and capacity expansion, are not fully absorbed, they argue, and that depresses profits. Daimler's bosses know this, too. Hence their ambitious plan aims to lift margins at MCG to 10 per cent by 2013 – and 11 per cent the year after, if Goldman is right.
Clearly, Goldman's analysts are ultra-bullish about Daimler. Pre-tax profit should swell by a third in 2013 to €11.9bn, they say, driven largely by an improving product cycle, cost controls and better than expected operational execution. Goldman's 12-month target price of €86 looks too optimistic - we don't expect the shares to double that quickly - but Goldman is not the only Daimler bull in town. Indeed, there's a real sense that next year will be the springboard for its ambitious '2020' plan, designed to win back the luxury car crown for Mercedes.
DAIMLER (Ger: DAI) | ||||
|---|---|---|---|---|
| ORD PRICE: | €40.33 | MARKET VALUE: | €43bn | |
| TOUCH: | €40.30-€40.33 | 12-MONTH HIGH: | €53.95 | LOW: €29.02 |
| DIVIDEND YIELD: | 5.6% | PE RATIO: | 7 | |
| NET ASSET VALUE: | €37.2 | NET DEBT: | 123% | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€bn) | Earnings per share (€) | Dividend per share (€) |
|---|---|---|---|---|
| 2008 | 98.5 | 2.80 | 1.71 | 0.60 |
| 2009 | 78.9 | -2.30 | -2.63 | nil |
| 2010 | 97.8 | 6.63 | 4.28 | 1.85 |
| 2011 | 106.5 | 8.45 | 5.32 | 2.20 |
| 2012* | 112.4 | 8.95 | 5.58 | 2.25 |
| % change | +5 | +6 | +5 | +2 |
Beta: 1.4 *Goldman Sachs forecasts £1=€1.22 | ||||
If all goes to plan, Daimler will shift 1.6m Mercedes-Benz cars in 2015, a quarter more than last year. And the numbers look achievable, especially given that Mercedes' product cycle has just bottomed out at over four years old; by 2014 it will be younger than BMW's. Three new cars will also form part of a "compact-class offensive" aimed largely at BMW's 1-Series and Audi's A3. An updated B-Class launched last year and impressive new A-Class this September should win valuable share in this key market.
Moreover, a new GLK compact sport-utility vehicle (SUV) and G-Class off-roader in June, full availability of the new M-Class, and latest GL in September, should drive growth in SUVs, chronically neglected by Daimler in the past. Introducing new C and S-Class vehicles means Mercedes will have turned out 10 new models by 2015.
A new $1bn (£631m) factory at Kecskemet in Hungary has just begun filling the 100,000 orders received for the B-class since November. Together with the Rastatt plant in Germany, there's enough capacity to make 450,000 vehicles a year. And Daimler will need it if, as expected, sales of the A and B-Class cars double between now and 2014.
Savings in Hungary will help Daimler tackle rising costs, put at an eye-watering €6bn - much of that stems from delays in addressing emissions targets, extra content and more expensive raw materials. German staff want a 6.5 per cent pay rise, too, but they'll be lucky to get half that. In Hungary, Daimler's workers earn 70 per cent less, making production costs nearly a third cheaper than in Germany. And redesigning both models means they already cost about 10 per cent less to make. Shutting the loss-making Maybach unit when the first of three new top-end S-Class cars is launched next year also makes sense.
True, previous offensives haven't gone well and a project of this size carries with it a high degree of execution risk. Still, 2012 looks promising already. MCG had a record month in March and a best-ever first quarter. "Our company is on the way to its best form, but is not there yet," says Dieter Zetsche, group chairman and head of MCG. "We are confident we can do more, and that also applies to our share price."
Meanwhile, shareholders are becoming increasingly critical of the company's involvement in Formula One racing. The bosses are unlikely to pull out, though, given recent success on the track. Offloading a 7.5 per stake in €25bn Airbus owner EADS later this year may soothe tensions.
But China looks especially promising. And, given the highly cyclical nature of Daimler's markets and falling sales in western Europe, it is here that its strategy will be decided (see box below).
The annual global vehicle market will have grown 50 per cent to 120m units by 2020, according to estimates, fuelled by emerging economies, where, increasingly, motorists are wealthy enough to afford a bit of luxury. China is already Mercedes' third-largest market and its premium car market is tipped to deliver compound annual growth of over 14 per cent to 2020. Sales there grew by 39 per cent last year to over 223,000 - 16 per cent of the group total - and price cuts helped sell a record 55,000 cars during the first quarter of 2012. By 2015, China will have overtaken both the US and Germany to become Mercedes' largest market. Goldman Sachs thinks it may take top spot before that; and why not? Three new compact models will be rolling off assembly lines by then and Daimler is pumping €2bn into its joint venture with Beijing Automotive to expand annual capacity to 300,000 vehicles. What's more, Daimler and another local carmaker, Warren Buffett-backed BYD, have just unveiled their new battery-electric concept car under the China-only brand, Denza, at the Beijing Motor Show. Production will begin next year. Of course, there are risks here - first-quarter GDP growth of 8.1 per cent was disappointing - but most commentators think that Chinese government intervention will soften the landing. |
Daimler knows how to make trucks, too. This often-overlooked division was responsible for €28.8bn of sales and €1.9bn of operating profit in 2011, up 20 per cent and 41 per cent respectively. Margins there jumped by a percentage point to 6.5 per cent. The new flagship Actros - 'Truck of the Year' in 2012 - and ongoing recovery in global truck markets, particularly the US, suggest Daimler should beat its 8 per cent margin target for 2013 with ease.
Almost 426,000 trucks were sold last year and that's expected to top half a million in 2013 and 700,000 in 2020. Plans to raise its stake in Russia's Kamaz to 25 per cent will help, as will production at a new plant in India this autumn - a clear challenge to Tata - and first production from a long-awaited joint venture with Foton in China at around the same time. The backdrop for orders seems to be improving in Europe and Brazil, too.
