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Mercedes Pleases Investors With Big Profits, Promise Of More

Mercedes Pleases Investors With Big Profits, Promise Of More.

“not just a model cycle issue but a structural improvement in the earning capacity of the group, resulting from a reinvigorated brand”

Daimler’s luxury car-maker Mercedes-Benz surprised investors with better than expected profits in the first quarter, and analysts scrambled to raise their forecasts for the rest of the year and 2016.

Daimler’s first quarter earnings before interest and tax (EBIT) rose 41 per cent compared with the same period last year to 2.93 billion euros ($3.2 billion) and Mercedes-Benz increased its profit margin to 9.2 per cent from seven per cent. Most analysts had expected an increase to 8.3 per cent.

Berenberg Bank auto analyst Adam Hull said he’d under-estimated Mercedes profits, not expecting the margin to reach 9.2 per cent until next year.

“This now seems very conservative,” Hull said.

Hull said economic conditions had improved, particularly in Europe, since he published his forecast in January and the Euro had weakened, giving German companies a price advantage in big markets like the U.S. and China. This could mean a two point increase in Mercedes’ profit margin by 2016, he said.

Mercedes has been on the crest of a wave of new model launches, like the new C class, top-of-the-range S class and little CLA sedan, GLA compact SUVs and little Smart city cars, which have been well received by buyers. But that doesn’t explain all of the improvements, according to Hull.

“(this) is not just a model cycle issue but a structural improvement in the earning capacity of the group, resulting from a reinvigorated brand plus a truck upswing and (foreign exchange) boost,” Hull said.

Mercedes is also in the middle of a cost-cutting and efficiency program.

The latest profit figures led moustachioed legend of former Daimler-Chrysler days and former Detroit resident, current Daimler CEO Dieter Zetsche, to sound very confident.

“Our growth strategy, our product offensives and our efficiency programs are paying off. We have already achieved a lot, we look to the future with great confidence, and we aim to achieve even more,” said Zetsche, announcing the results.

Citi Research analyst Philip Watkins said that Mercedes’ model cycle renewal programme was far from over and noted the company’s confirmation that 2015 EBIT profit will be significantly higher than 2014’s.

Bernstein Research analyst Max Warburton also expected to see more profit upgrades for Daimler’s Mercedes but added a note of caution. He pointed out that this might not be a great time for investors to hold on to auto shares because stock prices were already at a record, global economic growth was slowing and China, almost a license to print money for luxury car makers, was deteriorating. He did concede though that Mercedes was growing faster than rivals like BMW and Audi.

“But at some point the product cycle will peak and China’s realities will catch up with Mercedes too,” Warburton said.

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