Catch cheap Daimler at full throttle

China has been key to this success. Amid fears of an economic meltdown in this key auto market - a concern that's weighed on Daimler's share price - the group has continued to deliver 40 per cent-plus growth in the country as a growing middle class clambers to get its hands on premium cars. Importantly, the China Passenger Car Association forecasts that volumes will grow at about the same pace in 2016 as last year. Luxury cars, which are typically more profitable and less volatile than the mass-market passenger car segment, are expected to outperform the market.

That backdrop saw the Stuttgart-based company confirm guidance for a significant rise in operating profit, having posted record sales for Mercedes-Benz cars in the third quarter. Plenty of this optimism is based on the launch of the new E-Class this year, Daimler's executive car range that has historically been its biggest contributor to cash and earnings.

The group's GLC coupe is also set to appear on dealership forecourts in 2016, before the arrival of the S-Class and plug-in hybrid models the following year. Analysts at Barclays expect about six car launches annually until 2020 as Daimler seeks to recapture its luxury car crown from German rival BMW. Judging by the popularity of the type of vehicles it's rolling out, this objective looks entirely feasible.

Such prospects appear out of sync with the shares' rating, which is at a discount to peers and the group's historical average based on a forward PE ratio of eight times earnings. Aside from concerns about China, there are a few other factors weighing on sentiment.

Firstly, rising research and development spending and housing a significant amount of production in expensive Germany have contributed towards a hefty debt pile. We would argue, however, that such investments are necessary if Daimler is to maintain its reputation for innovation and high-quality manufacturing. It's also worth pointing out that automotive manufacturers are known for being very capital-intensive businesses and that Daimler has done a good job of cutting costs.

In our view, concerns about the US heavy-duty truck market and the Volkswagen emission scandal ripple effect have similarly been overplayed. While demand in the former has petered out recently, a strong product range, including advances in fuel efficiencies, could steer this segment back to profitability, particularly as capacity issues subside.

And those concerned about any backlash from the VW scandal should note that Daimler's diesel range accounts for only about 4-5 per cent of its US car sales. In Europe the group is more dependent, but that is considered a more robust market and one that ultimately requires diesel to achieve 2020 emission standards.