Mercedes Margin Disappoints on Spending to Beat Audi

Daimler AG, the world’s third-largest maker of luxury vehicles, reported a first-quarter profit margin for the Mercedes cars division that came up short of expectations as it spends on new models.

Earnings before interest and taxes at the maker of the Mercedes-Benz S-Class luxury sedan were 7 percent of sales, narrower than some analysts forecast and trailing the 10.1 percent at Volkswagen AG’s Audi.

“For Mercedes still to be only doing 7 percent margins in a really top quarter for the S-Class is a little bit disappointing,” Harald Hendrikse, an analyst with Nomura Holdings Inc. in London, said on Bloomberg Television. The company “needs to cut more costs” to reach its long-term target of generating a 10 percent return on car sales.

Daimler is investing in bringing out 30 Mercedes models by the end of the decade, including a dozen all-new vehicles, as part its effort to gain the top spot in global luxury-car sales and profitability. Mercedes, which targets cost cuts of 2 billion euros ($2.8 billion) by the end of 2014, has shown signs of progress by increasing deliveries in the first quarter at a faster pace than Bayerische Motoren Werke AG and Audi.

Group Profit

The disappointing profitability at Mercedes overshadowed Daimler’s 95 percent surge in first-quarter profit. Group Ebit climbed to 1.79 billion euros from 917 million euros a year ago, as profit from cars and trucks more than doubled, the Stuttgart, Germany-based company said in a statement today.

“The sentiment on auto stocks in general has turned rather negative,” said Juergen Pieper, an analyst with Bankhaus Metzler in Frankfurt. “Investors are more skeptical and cautious and are fishing for problems.”

The German manufacturer’s stock fell as much as 3.3 percent to 65.59 euros and was down 1.8 percent at 4:06 p.m. in Frankfurt. The shares have gained 5.8 percent this year, valuing the company at 71.2 billion euros.

Daimler’s revenue climbed 13 percent to 29.5 billion euros on higher vehicle sales. First-quarter Mercedes deliveries jumped 15 percent to 374,300 cars, lifted by a 71 percent surge in demand for the high-margin S-Class sedan and a 28 percent gain in sales of compact models such as the GLA sport-utility vehicle, which went on sale in March.

Deliveries by segment-leading BMW and No. 2 Audi each rose 12 percent in the period. All three German luxury-car makers are targeting record sales in 2014.

Bearing Fruit

“Our strategy is paying off; our investments are bearing fruit,” Chief Executive Officer Dieter Zetsche said in the statement. “As the year progresses, we will continue working systematically on our profitable growth path.”

Daimler stuck to a target to report Ebit from ongoing business this year that “significantly” exceeds 2013’s 7.9 billion euros. The company expects the pace of growth to accelerate in the course of the year.

“The first quarter should be the lowest quarter in cars and trucks,” Chief Financial Officer Bodo Uebber said on a call with analysts today. “The pattern that you have seen last year -- that the second-half earnings was better than the first half -- will also be true this year.”

Mercedes-Benz Cars, which also makes the Smart two-seater, more than doubled first-quarter Ebit to 1.18 billion euros from 460 million euros a year earlier, lifted by sales gains in China and the U.S. and cost cutting. Its profit margin a year ago was 3.3 percent.

Retail Restructuring

To help meet its goal of boosting margins to at least 10 percent, Mercedes is in talks to sell some sales outlets in Germany and is considering creating a separate entity for other wholly owned dealerships in its home country. Daimler employs about 15,000 people at 158 sales and service locations in Germany. The retail operations have top margins of about 2 percent, said Ilse Kestin, an IG Metall union representative.

The retail operations in Germany are “not sufficiently profitable,” Uebber said today.

As well as streamlining operations, Mercedes is looking to add more evocative models. Last week at the Beijing auto show, the brand unveiled a prototype of a coupe-style SUV that will take on models like the BMW X6. The sporty crossover with a low, sloping roofline will go into production next year.

Tesla Charge

First-quarter Ebit at Daimler, also the world’s biggest truckmaker, included a 118 million euro charge related to the sale of its 50 percent stake in Rolls-Royce Power Systems Holding GmbH, formerly known as Tognum. The manufacturer agreed in March to dispose of the holding, which is valued at 2.43 billion euros, to focus on auto making. The transaction is expected to close by September.

Daimler’s earnings were also burdened by 161 million euros in costs related to hedging its shares in electric-car maker Tesla Motors Inc.

The German manufacturer’s trucks unit reported profit that nearly tripled to 341 million euros, helped by cost reductions and demand for Freightliner vehicles in North America and Fuso models in Asia. The company plans to continue savings efforts throughout the company.

“The programs are going well,” Uebber said. “We’re very optimistic that we’ll reach the savings targets.”