Daimler AG (OTCPK:DDAIF) is scheduled to announce its Q4 and full-year earnings on Feb. 7. It has been a mixed year for the German automaker as falling margins and tepid sales in the first three quarters of the year has cast a gloom on the company's outlook. However, better than expected reception of its A-class and anticipated launches of refreshed models in 2013 have once again given a ray of hope.
The refreshed A-class seems to be winning over customers -- the company has received 90,000 orders for the model until December. Deliveries of the new A-class began in September and the car has generally received positive reviews on its looks, engine and safety as well as on other features such as emergency braking anti-collision system, driver fatigue monitor and tire pressure warning.
Although Mercedes-Benz achieved its highest ever unit sales in 2012 (up 4.5% to 1.45 million units), it will be disappointed to not close the gap on BMW and Audi. One of the reasons why BMW and Audi continue to outsell Mercedes is because the automaker has one of the oldest portfolios. Therefore, Mercedes plans to launch 10 new vehicles by 2015 which will widen its portfolio to include a greater variety of compacts, coupés and SUVs. In 2013, the automaker will launch refreshed models of the S-Class and the E-Class.
Mercedes sells more than a fifth of its vehicles in the U.S. and the automaker will look to bolster its American sales in 2013 with the help of the new CLA 2014. The four-door CLA, whose advert has already featured during the Superbowl, will lower the company's entry-level model in the United States by $7,000. It will be priced at around $30,000.
Can Margins Improve?
Profitability remains an issue for Daimler. Mercedes' margins currently trail those of BMW and Audi (operating margins at ~8% compared to ~10% for BMW and Audi). Margins have not picked up as much as the company had hoped for at the start of 2012. Mercedes had originally planned to generate similar levels of net income as it did in 2011, but margins dropped due to a weak European automobile industry combined with a slowdown in China.
Daimler's margins could benefit from a rising proportion of vehicles being manufactured at its Hungarian plant. Shifting production to low cost hubs such as Hungary where labor wages are one-fifth those in Germany should help reduce costs. Mercedes-Benz's Hungarian plant was built at a cost of €800 million (or $1.07 billion) to manufacture its B-class compact car and production began in March 2012. Daimler later announced it could double the plant's production to 300,000 vehicles annually by 2015.
The German automaker has pushed back its plan of achieving 10% operating margins for the car division by at least a year now. In the previous quarter earnings, the automaker lowered its full year operating profit to around 8 billion euros, down from the previous guidance of 8.8 billion euros. We'll have a keen eye on Q4 margins since Daimler’s management has a history of missing its guidance.
We have a price estimate of $56 for Daimler's stock, which is in line with the current market price.
Disclosure: No positions.