Mercedes, BMW Still Have Champions Despite Share Havoc

Mercedes, BMW Still Have Champions Despite Share Havoc.

“we believe the auto sector, particularly the German manufacturers, looks oversold”

Despite declaring they would not be implicated in the Volkswagen diesel denial debacle, Mercedes (through its parent Daimler) and BMW have suffered on stock markets as investors dumped auto shares in general.

Berenberg Bank though revisits the case for investing in these companies, and declared that it favours Mercedes over BMW.

“We think Daimler should trade at a premium to BMW; due to a higher long-term margin at Mercedes Cars – better mix and greater cost improvement potential,” said Berenberg Bank analyst Adam Hull, who said that Mercedes truck division adds to the attraction.

Despite Mercedes and BMW diesel denials, the bank expects slightly lower E.U. margins and lower diesel residual values. The bank sees these factors looming in the future for BMW, and probably to Mercedes too –

• The discrepancy between test results and real-world emissions has increased political pressure for a tougher testing regime.
• About 70 per cent of BMW’s EU sales are diesels, and a move away from diesels in Europe would make 2020 CO2 targets harder to achieve, and necessitate more low-margin electric or plug-in hybrids.

Another problem for BMW will be a sharp rise in competition from Mercedes, but also the upcoming new Audi A4 and A5, and the Jaguar XE small saloon and F-Pace SUV.

Morgan Stanley pointed out that Mercedes new model onslaught means its outlook for 2015 is robust, but the top of the range S class will lose momentum next year which won’t be matched by success of the new E class.

Morgan Stanley analyst Harald Hendrikse said 2016 could be the last year of strong sales and profit increases at Mercedes.

“Slowing global growth in premium car sales, and risks from Audi’s pricing behaviour could impact overall pricing in 2016 also,” he said.

Audi is likely to be forced into price cutting as it fights off the impact of higher lending costs resulting from credit rating cuts at VW.

Limited risk
Hendrikse said though that for the time being the risk of the shares falling further look limited.

“Following the recent China and VW news flow, we believe the auto sector, particularly the German (manufacturers), look oversold. Although we prefer BMW over Daimler longer-term, both BMW and Daimler seem more interesting at current (price) levels,” Hendrikse said.

“Although we see cyclical risks, the improvement in GDP/China sentiment could see BMW recover another 10 per cent. Without cyclical improvement, we think BMW outperforms a falling sector, as it has done previously,” Hendrikse said.