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Mercedes Profits Boosted By Attractive New CLA, E Class

Investors See Similar Boost from New S Class, GLA, C-Class.

But Shares Look Over-Valued Compared With BMW, VW.

Mercedes plan to introduce flashy new models and produce them much more efficiently than it managed with the old worthy dullards is starting to pay off big.

In the third quarter, Mercedes parent company Daimler reported profit before interest and taxes (EBIT) rose 16 per cent to €2.23 billion from €1.92 in the same period last year, as sales of the attractive new CLA and face-lifted E class accelerated. With sales of brand new versions of the top of the range S class just getting underway, and a new GLA compact SUV, set for launch in the spring, analysts expect profit margins to fatten and sales to gain momentum.

“The years 2014 and 2015 will benefit from an ongoing renewal of the product range of Mercedes,” said Commerzbank analyst Daniel Schwarz.

A new Mercedes C class is also launched next year. Mercedes is late to the party, but is now implementing a modular production strategy similar to that pursued recently by BMW, which saw this company produce what Schwarz called “eight consecutive earnings surprise in 2010 and 2011”.

“Besides a positive impact on pricing this has implications for the cost base: the new C-class shares a much higher proportion of common parts with the S-class, the new GLA is based on an A/B class platform but has a significant premium of about €3,500,” Schwarz said.

Morgan Stanley’s Laura Lembke is also impressed with Mercedes, but sees some clouds on the horizon, including the threat of foreign exchange hits to the bottom line.

Leaner investment phase
“Mercedes is about to enter a leaner investment phase after a period of heavy spending to catch-up on missed opportunities in product, markets and technology. With accelerating product momentum and a more competitive cost base, margins and free cash flow should benefit,” Lembke said.

Lembke warned though that Mercedes still lagged the competition in China, platform scale advantages might not last long, and it has yet to define its electric vehicle strategy. And next year, losses from foreign exchange  transactions could reach €450 million.

Daimler said 2013 EBIT earnings will fall to €7.5 billion from 2012’s €8.1 billion. Commerzbank expects this to rise to €10.9 billion in 2014.

The Financial Times’ Lex column joined in the praise for Mercedes, but pointed out that despite all this progress, Daimler’s shares, which has been steadily rising since the summer, could be seriously over-valued.

“Daimler shares trade on 11 times 2014 consensus earnings, against a 10 times multiple at BMW and just seven at VW with its broader car range,” Lex said.

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