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The new introductions and model refreshments finally began to make a mark on Daimler AG's (OTCPK:DDAIF) earnings as the company reported a strong set of third quarter numbers. Daimler AG's revenues jumped 5% to 30.1 billion euros (~$41 billion), helped by higher sales of vehicles sold under the Mercedes-Benz brand. Net income swelled 61% to 1.9 billion euros (~$2.6 billion). [1]

Daimler now expects fourth quarter operating profits to be higher compared to the previous year period. However, for the full year, profits would still trail those in 2012 due to weak results in the first quarter of the year.

We have a price estimate of $72 for Daimler's stock, which is about 10% lower than the current market price. We are in the process of revising our estimates to incorporate the latest earnings.

Cars and vans sold under the Mercedes brand account for more than 70% of the valuation, as per our estimates. In addition to the Mercedes-Benz brand, the company also sells buses and trucks under the Daimler brand.

Moving In The Right Direction

Daimler AG's stock has climbed more than 40% since the start of the year as renewed enthusiasm about the company's product portfolio has lifted the shares higher. It was important for Daimler to post strong results this time around in order to reaffirm the trust of the market. Management had stressed that the second half of the year would be better than the first. Therefore, it was the magnitude of the margin expansion that was in the spotlight.

Back in the first quarter of the year, Daimler's operating margins had fallen to 3.4% due to one-time costs associated with the launch of new/refreshed models, causing the company to lower its guidance. Thus, there were concerns that the automaker would not be able to deliver on its promise.

However, margins rebounded to 6.6% in the second quarter and the automaker's overall results showed signs of a turnaround. With the newly released models fetching higher prices, the segment's margins improved further to 7.3%. Daimler has a long-term target of achieving 9-10% operating margins for its Mercedes-Benz, which is critical if the automaker needs to close in on its German counterparts. Rivals Audi and BMW regularly clock operating margins in excess of 10% despite selling more vehicles.

Reinvigorated Product Portfolio Delivers Results For Mercedes

Sales of Mercedes-Benz climbed 15% to 460,700 units (including vans sold under the brand). For the first nine months of the year, Mercedes sold 8% more vehicles than the previous year figure. A steep rise in the company's Chinese sales and sustained demand for Mercedes vehicles in the U.S. boosted the unit sales. [2]

The year was going to be big for Mercedes as the automaker was scheduled to debut a number of refreshed/new models, including its best selling E-Class sedan. The product offensive is part of Mercedes' strategy to regain the crown of the world's largest automaker by 2020.

The new introductions will also fill in the gaps that had existed until now in the automaker's product portfolio. For example, the new CLA was launched to lower the entry level price of Mercedes vehicles and help the company compete against the likes of BMW's 1-series and 3-series, and Audi's A3 and A4, which are hugely popular with the younger demographic. Similarly, the new GLA-Class, introduced in the third quarter, is a subcompact SUV - a profile that was missing in the automaker's portfolio until now.

During the third quarter, Mercedes also debuted the refreshed S-Class, for which it has already received 30,000 orders. With the deliveries of the S-Class and GLA-Class models set to gain momentum, Mercedes operations should continue to witness improvement in the fourth quarter.

Disclosure: No positions.

Source: Daimler Reports Strong Earnings As New Models Lift Pricing And Sales