Daimler CEO Strategy Vindicated as Buyers Snatch Up Cars

Daimler AG forecast fourth-quarter operating profit will advance as customers snatch up the Mercedes-Benz CLA coupe, E-Class sedan and flagship S-Class, an indication Chief Executive Officer Dieter Zetsche’s strategy to roll out new models to boost earnings is gaining traction.

Just eight months ago, Zetsche received a new contract of only three years, instead of the usual five, after investors and labor leaders pushed for a shorter extension on concerns Daimler wasn’t progressing in efforts to increase profit.

Today, the shares rose to the highest in almost six years after the Stuttgart, Germany-based automaker reported a 16 percent increase in third-quarter earnings before interest and taxes to 2.23 billion euros ($3.08 billion), beating the 2.09 billion-euro average estimate of 11 analysts.

“This shows that the high investments we have made were money well spent,” Zetsche said in a statement today. “We will continue to invest in products and production sites.”

Mercedes, the world’s third-largest luxury brand, is experiencing a resurgence in popularity as the four-door CLA, A-Class hatchback and van-like B-Class compact lineup outstrips production capacity. The gains in the carmaker’s nine-month deliveries exceeded those at Bayerische Motoren Werke AG and Volkswagen AG’s Audi.

Sustainable Improvement

Along with the compact models, Mercedes in April started selling a revamped E-Class, an up-market sedan that competes with BMW’s 5-Series and Audi’s A6. A new version of the S-Class, the most expensive Mercedes sedan, came to market in July. The automaker has more than 30,000 orders for the revamped flagship model, Chief Financial Officer Bodo Uebber told reporters today.

“The earnings improvement could well be sustainable,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “Daimler is currently more dynamic than the competitors.”

The German manufacturer’s shares gained 3.3 percent to 60.32 euros, the highest close since Jan. 3, 2008. The stock has advanced 46 percent this year, valuing the company at 64.5 billion euros.

Zetsche has expanded Mercedes’s current product range of 23 cars and sport-utility vehicles, up from 19 six years ago. He’s also developing another 13 all-new models in the next eight years, including the GLA compact SUV due in showrooms in early 2014.

Higher Profitability

“We could sell more” of the new compact cars, “but are currently restricted by production capacity,” Uebber said. The new vehicles are “hitting the mark” with customers, which is reflected by growing European market share, he said. “It’s very encouraging.”

Mercedes-Benz Cars, which also includes the Smart city-car brand, posted a third-quarter operating margin of 7.3 percent, higher than the year-earlier figure of 6.4 percent and better than in the first half. Third-quarter group revenue at Daimler, also the world’s largest maker of heavy-duty trucks, gained 5.3 percent to 30.1 billion euros.

Faster-than-expected progress in a cost-cutting program at the Mercedes-Benz passenger car division also lifted third-quarter profit, Uebber said. The unit, which aims to lower spending by 2 billion euros through 2014, achieved 70 percent of the savings for this year by the end of September.

“The momentum is supporting Daimler,” said Frank Biller, a Stuttgart-based analyst with LBBW. “We expect that Daimler will continue to improve margins and diminish the gap to the competitors.”

China Growth

BMW, Audi and Mercedes are all targeting record global deliveries in 2013 as growth in China, the U.S. and South America offsets a sixth straight drop in annual industrywide sales in Europe. In the past month, Mercedes has outlined plans to return to carmaking in Brazil by 2016, and stuck to a 67 percent expansion in South African production by mid-2014 in a strategy to meet emerging-market demand with local output.

Mercedes’s growth in China, the world’s largest automotive market, had been hampered by a distribution structure that split deliveries of locally made and imported vehicles. The carmaker combined the sales units last December. In August, Daimler said it will invest 2 billion euros to double local production to more than 200,000 vehicles.

Daimler is on track to open 75 new dealerships in China this year, Uebber said. About half the new showrooms are already up and running, and the rest will follow this quarter.

Daimler expects the purchase of a 12 percent stake in Beijing Automotive Group Co.’s auto division to close before the end of the year, Uebber said. Mercedes and BAIC, as the Chinese company is known, already operate factories together making the German brand’s C- and E- Class sedans and GLK SUV.

“Daimler’s third-quarter figures are pointing in the right direction,” said Hans-Peter Wodniok, an analyst at Fairesearch GmbH in Kronberg, Germany. “Zetsche still has some work to do to close the margin gap to BMW and Audi.”