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Daimler AG (DDAIF) develops, manufactures, and sells a wide range of automotive products, primarily passenger cars, trucks, vans, and buses. The company’s luxury division, Mercedes-Benz, is one of the strongest luxury car brands in the world, and accounted for more than half of total sales in 2010. Daimler has production facilities in 18 countries and roughly 8,000 sales centers worldwide. It employs more than 265,000 people.
Business prospects at Daimler look bright. The automaker has been seeing increased vehicle shipments in nearly all divisions over the past couple of quarters. Management stated that profits for the year will be “better than previously expected and will very significantly exceed the level of 2010.”

We believe Mercedes-Benz cars will be the primary driver of the advance. During the second quarter of 2011, this group increased its unit sales to a record 357,600 vehicles. Profits there benefited from the higher volume, along with a good product mix and better pricing. Strong demand for numerous models, including the C-Class and the S-Class, should allow the group to report a unit sales record for the year.

Thanks to solid demand in Europe and the United States, we anticipate continued strong gains from Daimler Trucks, the company’s second largest division. The group, which makes vehicles under the Mercedes-Benz, Freightliner, Western Star, and Fusa brand names, maintains the leading position in the medium- and heavy-duty truck segments in Western Europe. It is also the market leader in class 6 to 8 trucks in the NAFTA region. Although Asian sales have been hurt in recent months by the tragedy in Japan, we believe demand in the region ought to rebound over the next couple of quarters, thanks in large part to particularly strong demand from China. 

The company’s Mercedes-Benz Vans group will likely remain a solid growth driver, too. The division, which produces the Sprinter, Vito, and Vario series of vehicles, ought to benefit from an ongoing market recovery in Europe, which accounts for roughly 77% of the segment’s unit sales. We also expect better results in the United States and China. Efficiency improvements and better pricing should help support sound profit gains over the coming quarters.

Daimler Buses, the company’s smallest division at about 5% of total sales, has been hurt by lower unit sales of complete buses in Europe. Although the group has been seeing positive demand trends from Latin America and Turkey, we don’t think this will be enough to offset ongoing weakness in both Europe and North America.

Despite the bright outlook for the company, there are some significant risks. Raw materials prices have continued to trend higher, and this could hurt margins and profitability. Although management may be able to pass these costs onto customers via higher selling prices, this would likely temper total volume gains.

We also remain concerned about the global macroeconomic recovery. The United States market appears to be on unstable footing, given recently released GDP growth figures that were lower than expected. A reduction in auto demand here, or other primary markets, including Germany, China, or the United Kingdom, could severely hurt overall sales and profitability. Higher emissions requirements could also warrant a significant R&D burden, although this would affect the industry as a whole.  

We believe Daimler has many growth opportunities in the premium auto market, in both established regions, including Europe and North America, as well as in developing economies, particularly in Asia. We view China as an especially important driver of growth, given its strong GDP growth expectations and increasing numbers of middle and upper class individuals. Management has improved its guidance for the second half of the year, driven by strong demand for both Mercedes-Benz Cars and Daimler Trucks. Assuming investors can withstand some uncertainty regarding the global macroeconomic environment, we think in Daimler offers a good opportunity at this juncture.   
 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.