A Fair Share: Looking beyond the cycle
As Daimler shares edge towards the EUR70 level, is now the right time to head for the exit? We
remain convinced that it’s still too early in either Mercedes’ market share revival or the European
truck cycle to sell now. We stay at Outperform with a target price of EUR80.
* A fair share: Are we still too conservative on Mercedes’ growth potential?
We believe Mercedes is entering a structural growth phase that extends beyond the current
product cycle. Having lost 500bp of global share over the past decade (and 800bp in EU), we
believe a younger customer base, catch-up potential in China and more competitive
product/technology will enable Mercedes to begin to claw back market share. However our (&
consensus) estimates assume a barely flat share through to 2018. Clawing back 50% of lost share
could boost our Mercedes long-term EBIT by c.20%. In the shorter-term, we expect Mercedes
pricing to surprise positively as its takes back the product age crown that BMW has held for the
past 5 years.
* Operating leverage concerns misplaced: Q2 should ease concerns
A strong top-line seems a safe assumption. But what about the drop through to margins? The
bears made much of this at Q1, missing the point that Mercedes already delivered in Q1 nearly
50% of the entire EBIT delta we forecast for the FY in Mercedes. As the C and GLA contribution
kicks in from Q2, we expect a steady uptick in Mercedes margins towards 9% by Q4. Meanwhile
small but significant actions by management in recent months to trim the cost base (e.g. sales
network, RRPSH, EADS) bode well for future capital efficiency in our view.
* Valuation still attracts – we still see 15% upside to our EUR80 TP
That leaves valuation as the final piece of the equation. Here too we are still comfortable with the
Daimler case. At 9.8x P/E 15e and 50% EV/Sales, Daimler trades at a c.10% discount to its historic
average, despite offering up an EPS CAGR of 14% over 2013–16e. And while optically Daimler
trades in line with BMW on EV/Sales, excluding trucks (at a Volvo multiple), we calculate Daimler is
trading at a 20% discount to BMW. We value Daimler at EUR80 on a 2015 SOP.