--> Daimler shares could have more earnings power in 2014 and 2015 than expected a couple of months ago. The stock could rise about 20%, to €80, in the next 12 months, say analysts.
Quintessential German car maker is outpacing local rivals and has a chance to beat bullish forecasts, as its long-term investments pay off.
Daimler , the maker of Mercedes-Benz luxury cars, has moved into the passing lane and is threatening to put its German rivals in the rear-view mirror.
Thanks to a slate of popular car models and improving demand for trucks, Daimler's profit growth this year should outstrip that of Volkswagen , maker of the premium-priced Audi, and Bayerische Motoren Werke , whose BMWs are a staple of upper- and upper-middle-class neighborhoods. As a result, Daimler could be a bigger beneficiary of Europe's gradual recovery. The world's biggest manufacturer of commercial vehicles, including trucks, vans, and buses, also is looking to make deeper inroads into the lucrative China market, which should improve profitability.
Like its cars, Daimler's shares aren't cheap. After climbing about 48% in the past year, the stock (ticker: DAI.Germany) trades at a slight premium to Volkswagen and BMW. It recently closed in Frankfurt at 68.93 euros ($95.54), or roughly 12 times forecast 2014 earnings. Volkswagen (VOW.Germany) trades at 8 times and BMW (BMW.Germany) trades at 10. (Daimler has American depositary receipts that trade in New York under the ticker DDAIY .)
But Daimler's earnings per share are projected to grow at 17% this year and next, better than Volkswagen's expected 14% and 13% gains in those years, and BMW's 2% and 5% increases. With strong product offerings in all sectors, the car maker, which has a market value of more than €70 billion, could overtake even the most optimistic expectations. The stock could rise to €80 in the next 12 months, according to some analysts' estimates. Including the dividend that would be a return of about 20%.
Sales last year nudged €118 billion, compared with €114 billion the previous year. They are forecast to pick up steadily, reaching €137 billion in 2016. Management last month delivered a confident assessment of Daimler's prospects. "Our products are in great demand around the world," Chief Executive Dieter Zetsche told reporters. "Our efficiency programs are paying off, and our investments are bearing fruit." Zetsche wasn't available to comment for this article.
Investors view his optimism this early in the year as an encouraging sign of what lies down the road. "It is a very good indication that it can surprise the market positively," says Jon Ingram, a fund manager at JPMorgan Asset Management in London. He thinks the current valuation is attractive and counts Daimler among the top holdings in his Intrepid European fund (VEUAX).
DAIMLER TRACES ITS origins to the 1880s, when Gottlieb Daimler and Carl Benz separately pursued development of internal combustion engines. They weren't the first to do so, but they persevered. The engineers reputedly never met, but their companies merged as Daimler-Benz in 1926 and manufactured the first Mercedes-Benz in the same year. (Daimler produced cars under the Mercedes brand, named after the daughter of a businessman who funded development of a high-performance car.)
There have been a few potholes along the way. Following the devastation of World War II, Daimler restarted production in 1947 but didn't resume European expansion until 1955. A move into aerospace and electronics in the 1980s ended badly. In 1998, Daimler acquired Chrysler for $36 billion as a way to advance the auto industry's consolidation. But DaimlerChrysler, as the merged entity was known, struggled to leverage that scale. Chrysler's problems—a costly restructuring, huge losses, and onerous labor costs—sank the combination. By 2007, Daimler had ditched the U.S. car maker.
THE DIVESTITURE OF CHRYSLER coincided with the beginning of the worst downturn in the history of the auto industry. However, luxury-car makers fared better than most. Daimler invested in developing a broad line of smaller vehicles to meet the needs of environmentally aware and cost-conscious consumers. It is now reaping the rewards.
Among its top-selling compact cars are the A-class, B-class, and CLA, the first of which was launched in 2012. There's also buzz around the launch this month of the GLA, a compact sport-utility vehicle that will expand the range of offerings further. Sales of compact autos were up 66% last year from 2012 and accounted for a quarter of the 1.57 million cars the company sold in 2013. Analysts at Deutsche Bank see total sales rising steadily, to 1.74 million in 2016.
Compacts have helped to reinvigorate the brand, with more-affordable sticker prices and fuel-efficient engines drawing in new and younger drivers. (In the U.S., a basic CLA sedan starts at just under $30,000.) The average age of CLA buyers in the U.S. is 45 years old—10 years younger than the average Mercedes-Benz customer. It's an important shift for the company.
While getting a lift from its compacts, Daimler also has revamped its S-class luxury sedan, the standard bearer for Mercedes-Benz cars since 1972. Daimler sold 71,000 S-class cars in 2013, down from 81,000 in 2012. However, the latest generation was launched only in the second half of last year, and fourth-quarter sales of 27,000 demonstrate encouraging momentum. A cascade of new models will continue rolling off the production line well into 2016.
Daimler's trucks business, which includes the Mercedes-Benz, Freightliner, and Western Star brands, also seems to be chugging along nicely. Sales increased 5% last year, to 484,000 trucks. Aided by a strengthening global economy, orders from North America have taken off. In Western Europe, orders could pick up in the second half as the economic recovery continues, and Daimler is well positioned thanks to engines that comply with tough new European environmental standards. Weakness in emerging markets could impede progress, but analysts at HSBC see truck sales rising 5% in 2014 and 11% in 2015.
In Western Europe, there could be a pronounced uptick in demand for cars this year, which would be welcome. Overall sales have fallen 25% since 2006.
A strong product offering is helping Daimler to play catch-up in China, where late market entry and sales missteps leave it lagging some distance behind BMW and Audi. Daimler last year fixed a confused strategy that saw locally made and imported vehicles effectively competing for sales. At the same time, it opened 75 new dealerships across the country, bringing the total to 330, and introduced another seven models. China sales grew a healthy 15% last year. That was still behind BMW, which reported a 20% rise in the number of BMW and Mini vehicles sold in China. Audi reports 2013 sales on March 11.
Daimler plans to add another 100 dealerships to its Chinese network in 2014, and it has high hopes this year for brisk sales growth. It is already off to a fast start: Sales in January alone were ahead 45% year over year in China. Giving Daimler's performance in China a bit of luster, its lucrative lending business finances one in every five vehicles the company sells there.
Brisk sales in China will be critical in helping Daimler wring fatter profit from its business. It quietly abandoned a longstanding profit target equal to 10% of earnings before interest and taxes, after repeatedly falling short. UBS analysts forecast Ebit margin at 7.9% this year, with the cars division producing an 8.3% margin and trucks, 5% to 6%. Group margins could grow to 9% in 2015 and 9.3% in 2016, according UBS.
CAPITAL EXPENDITURE HAS passed the peak in the current cycle, which means more earnings will flow to the bottom line in the years to come. Daimler is expected to earn €5.84 per share this year, rising to €6.84 in 2015. It earned €6.40 in 2013, although that number was inflated by the sale of Daimler's remaining stake in the aerospace business, which bumped up earnings by €1.40 per share. Stripping out that figure, last year's earnings were €5 a share, so the forecasts suggest healthy growth.
Free cash flow, forecast at €2.8 billion this year, is relatively poor, and investors want to see improvement. Daimler may look at its workforce to make savings—it employs 275,000 workers, which looks bloated compared with BMW's labor force at 106,000. Stronger free cash flow could lead to bigger dividends. Daimler shares currently yield more than 3%. Though a bit pricey, Daimler offers drivers and investors the prospect of a comfortable ride.