Mercedes Pleases Investors, Then Carefully Ups Future Hopes.
Accelerating New Model Programme Will Boost 2015
“In the past, the market rarely took Daimler’s guidance too seriously. But these days Daimler’s view of the world has much greater credibility.”
Investors could hardly contain their glee following Mercedes Benz’s financial results for the last quarter of 2014, but after some reflection, enthusiasm still seemed to be the watchword.
Investors not only liked the numbers, they also praised Daimler’s new understated attitude to forecasts, which was seen as leaving room for over-delivery of conservative assumptions, an ability the company hasn’t been famous for in the past.
Mercedes-Benz operating profit margin, including Smart, rose to 8.3 per cent in the fourth quarter from 7.5 per cent in the same period of 2013. For the whole year the profit margin rose to 8.0 per cent from 6.2 per cent, as the Daimler subsidiary closed in on its 10 per cent target. The Daimler stock price didn’t react much, perhaps surprising considering its close to 50 per cent ramp up over the last four months. Mercedes makes up more than half of Daimler’s profits, with trucks and financing making up the rest.
Hopes are high for more progress in 2015, as Mercedes new model programme gets into top gear. The C class roll out will reach a peak, joining the GLA and Smart, with new SUV launches from GLK, GLE, and an M-class facelift. The new $1 million three-row Pullman version of the S-class will attract the spotlight.
Morgan Stanley analyst Harald Hendrikse was more restrained, waited for the dust to settle before calling for a pause in the euphoria for Mercedes’ prospects. Hendrikse pointed to past disappointments when investors had gone overboard, although he did concede that recent numbers looked good.
“Although we agree that Daimler’s fundamental outlook remains strong, that was also the case in August-September 2014, when the shares fell 30 per cent. We would suggest there are plenty more macro risks to current jubilant sentiment that could once again de-rate Daimler from here,” Hendrikse said.
Bernstein Research analyst Max Warburton seems to have been burned in the past by Mercedes’ over-optimism, but apparently, all is now forgiven.
“In the past, the market rarely took Daimler’s guidance too seriously. But these days Daimler’s view of the world has much greater credibility. It’s also a good reminder that when automakers change direction, they tend to continue on the new path for a number of years. Daimler has delivered positive surprises for two years now – a period during which it feels like we’ve constantly had to play catch up,” Warburton said.
After the 2014 profit news, Daimler CEO Dieter Zetsche said he expected significant growth in sales this year thanks to progress in China and the U.S. Operating profit would rise more than 10 per cent and sales by more than five per cent, he said.
Barclays Equity Research also liked the understated tone of Daimler’s pronouncements.
“We detected a new tone of caution in guidance and a desire to leave room to beat expectations,” said Barclays analyst Kristina Church.
“The Daimler of old might have begun the year lauding the favourable oil price and what it would mean for SUV mix, citing strong pricing from new products and emphasising high gross cost savings. But the new style seems to have baked some elements of caution into guidance and to highlight that they prefer action in terms of costs rather than words,” Church said.
Alongside the financial results, Daimler also outlined a new efficiency programme to combat the problem that although it makes fewer cars than BMW and Audi, Mercedes has a much larger work force, and to meet the 10 per cent medium term profit target.
Church worried that Mercedes, although she liked its spending programme to meet E.U. 2020 fuel efficiency rules, it might still be behind the progress made by its competitors.
Commerzbank analyst Daniel Schwarz also lauded the new conservative mood music, and has renewed confidence in the company.
“We think the 2015 planning is based on overall conservative assumptions, unlike in the past, Daimler’s market view seems to be mostly in line or below the level of peers. The ramp-up of the C-class, GLA and the Smart should allow for ongoing momentum in coming months. Management seems confident about the pricing development too, no complaints about rising discounts in China, like from some competitors,” Schwarz said.
“Mercedes is catching up With BMW and Audi, and two major disadvantages are still in place: Daimler is under-represented in the most profitable segment – SUVs – and most profitable region – China. Both will be addressed in the coming two years. Additionally, Mercedes will increase the number of cars produced on a modular basis. Mercedes runs at the same speed as its German peers, but has more room to accelerate from here,” Schwarz said.
The Financial Times Lex column took a tortured cheap shot at Daimler, based on its disapproval of the sound track used to liven up its annual report.
Daimler played what Lex called the “cheesy” Bachman Turner Overdrive “You ain’t seen nothing yet”. After listing the various plusses and minuses facing Mercedes cars it came up with this.
“So no dramatic shifts. Just more of what has worked recently. There is nothing here we haven’t seen yet,” Lex said.