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Mercedes Seeks To Justify Ambitious Profit, Sales Targets

Mea Culpa Admitted With Smart, A and B Class, Maybach
Huge Volume Expansion Might Clash With Profit Plan

Audi, BMW To Emerge Unscathed From Mercedes Blitz

“Mercedes is about to launch a big, big investment programme in an effort to grow the business. Returns may go down before they go up”

Mercedes has big plans to catch up with BMW and Audi’s superior sales and profits, but investment bankers have their doubts.

Mercedes has been schmoozing investors at meetings in Hungary and Berlin to spell out its plans for the future, whilst apologising for past failures. Most investment bankers agreed that these plans were impressive in theory, but not many seem to think they have much chance of success.

Mercedes problems are complicated and deep seated, but Credit Suisse analyst Arndt Ellinghorst pinpointed the biggest negative.

“Effectively, Mercedes required 35 per cent more employees to sell 18 per cent fewer cars than BMW in 2011,” Ellinghorst said.

“We believe Mercedes will continue to underperform BMW in the medium term. We remain convinced that savings and product momentum is a 2014/15 story, hence it is too early to justify a more positive stance on the stock today,” Ellinghorst said in a report.

Mercedes wants to more than double sales to 2.7 million by 2020 to become the world’s largest premium car maker. This would mean new plants in China, and either the U.S. or Mexico. Mercedes sold 1.26 million cars in 2011, 120,000 less than BMW. Mercedes has also pledged that operating profit margin would be more than 10 per cent in 2020.

UBS Investment Research reckons Mercedes can match BMW’s margins of 10 per cent by 2014, and welcomed what it called a more radical approach to fixing underperforming products at both ends of the range. UBS compares the underperforming small cars like the Smart and A and B class with the success of BMW’s Mini and 1 Series. The new A class, unveiled at the Geneva Car Show last month, is thought by UBS to be a great improvement over the outgoing model.

“Core profits from C, E and S Class appear comparable to BMW’s. The margin lag (200 basis points on average and 300 points in 2011) reflect weakness in A/B, Smart and Maybach as well as insufficient exposure to SUVs, all of which are being addressed in the coming 24 months,” said UBS analyst Philippe Houchois in a report.

Houchois has high hopes for Mercedes plans

  • From this year A and B Class new platform should reduce vehicle costs by about €1,500 or 10 per cent and remove technical constraints on developing new derivatives including SUVs enabling 100 per cent volume growth by 2016 with a range of at least five models versus two previously.
  • The closing of Maybach in 2013 should leverage the S Class sub brand into higher mix vehicles at little incremental cost. A modest three to five per cent incremental volume per annum would equal lifetime volume of the Maybach since launch.
  • The replacement of Smart For2 and relaunch of For4 using the joint platform with Renault will more than double current scale and reduce variable and manufacturing costs. Smart remains the largest drag on Mercedes earnings.

Houchois agrees with Credit Suisse’s Ellinghorst that excessive headcount has been a big problem, but worries that Mercedes isn’t taking this sufficiently seriously. He also pointed to fallout in the past from failed ventures like the ill-fated alliance with Chrysler. But he is in the positive camp.

“After several years of disappointment, we think the risk …. is to under-estimate the current management team’s ability to address long standing issues, in a turnaround similar to what happened earlier both at VW and BMW,” Houchois said.

Credit Suisse’s Ellinghorst sees progress being made at Mercedes, but doubts if it will be enough.

“We believe that Mercedes can grow faster over the coming years than it has over the last decade, as a result of the expansion of its small car range and the renewal of the C and E Class in 2014/15. We are less convinced that Mercedes can close the gap on BMW and Audi who have significant new product cadence between now and 2020 and who are unlikely to be prepared to stand on the sidelines,” Ellinghorst said.

Max Warburton, analyst with Bernstein Research, has been a critic of Mercedes’ failure to communicate clearly with investors. This has now improved. Warburton thinks that the turnaround programme will be difficult to accomplish.

“The choice of 2020 as a target year reflects how long such a turnaround will take and the reality is that Mercedes has brand, product and productivity issues that make the goal of retaking the lead questionable. Mercedes is about to launch a big, big investment programme in an effort to grow the business. Returns may go down before they go up,” Warburton said.

“The ambition is huge – Mercedes wants “significantly” over 1.6 million units by 2015, and if we understand management’s comments correctly, 2.8 million units in 2020. This is epic ambition, but China is expected to deliver over 50 per cent of the growth,” Warburton said.

“Really. REALLY”
“Warburton said the target for the A and B Class appears to be 600,000 a year by 2020 compared with only 250,000 now. Mercedes’ target of a three to five per cent price gap over BMW and five to seven per cent over Audi looks doubtful, especially as the company will be chasing sales.

“The most eye-popping claim was that the premium car market in China could amount to six million units in 2020, although this would include compact premium cars like the A Class and Audi A3. Of this Mercedes seems to think it can get 800,000 to 900,000. From just over 200,000 in 2011 to 800,000? Really? REALLY? (his caps)” Warburton said.

“Within the (premium) sector we are not convinced Daimler has any superior characteristics versus peers. Its product range my continue to struggle versus BMW in 2012 and 2013 – it has few product catalysts this year or next,” he said.

“We can’t see Daimler outperforming (on the stock market) for the rest of the year. Given the product programme, complex brand issues, it may actually be quite a few years before it has a chance to outgrow peers,” Warburton said.

Deutsche Bank also welcomed Mercedes’ ambition, but felt that the plan was too long term for it to be able to predict its likely success. BMW and Audi were likely to remain in the overtaking lane for some time yet.

Large potential
“Mercedes has well displayed its volume growth ambitions and aims to fight back in segments/regions where the brand today has deficiencies. However, with projected cost/investment increase we feel our view confirmed that the earnings/cash development over the coming 18 months stands on more fragile grounds than its peers,” said Deutsche Bank analyst Gaetan Toulemonde.

“The potential to improve remains large, but we feel that real benefits will only become truly visible from the second half of 2013 at the earliest (or potentially early 2014) which is too far out for us to anticipate,” Toulemonde said.

Neil Winton – April 20, 2012

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