German car manufacturers such as Volkswagen AG (VLKAY) and Daimler AG (DDAIF) have a great reputation in the global auto industry. As the U.S. economy recovers and China experiences great demand for imported vehicles, both these firms anticipate huge benefits. However, while Daimler is on a straight path to success, Volkswagen has been struggling as of late.
Sluggish Sales in Europe and North America
Volkswagen has been disputing the position of largest car manufacturer with General Motors Co. (GM) and Toyota Motors (TM) for years. Its global strategy has delivered great results over the years, especially due to its manufacturing system, which enables great cost savings. However, the third quarter of 2013 saw revenue drop 6.4% in one of its most important markets, the U.S., with unit volume decreasing by 13.5%. The company's Volkswagen brand was especially weak, with sales dropping by 30%.
The relative strength of the euro versus the U.S. dollar has been troublesome for Volkswagen, shrinking revenue even further. The decline in sales, which extends to Latin America, might be temporary. With free cash flow taking on negative values, and debt levels rising, the company could be facing a difficult start to 2014.
In addition to the reduction in sales volume, Volkswagen had to recall 2.64 million vehicles in 2013, in order to fix drive system and electronic issues, most of them stemming from China. This will surely not look good on the German car manufacturer's resume, in a country that is expected to balance the negative results of other operations. As market leader in China, with a market share above the 15% mark, the company already has a strong foothold. Yet there is much work required, in order to obtain the necessary results to offset the poor performance in Europe and the Americas.
Volkswagen was expected to perform better, especially due to the firm's $45 billion investment in expansion projects since 2007. Production rose steadily at it's now more than 100 pl! ants, yet car sales didn't rise as anticipated, leaving the company to foot the bill. The stock is currently trading at 0.3 times its trailing sales, which means shares are available at a 49% price discount relative to the industry average. Nevertheless, the discount is also indicative of the firm's slow growth and lack of opportunities for shareholders to make a profit. Overall, I feel bearish regarding this stock.
A Luxury Car Manufacturer at a Price Discount
Daimler AG is highly diversified car manufacturer, with a product offering ranging from small vehicles, to luxury cars, and heavy trucks. Mercedes-Benz, the firm's premium brand, is not only world renowned, but has been enjoying high sales volumes in China and the U.S. As the sustained demand for the luxury vehicles moves forward globally, the rise in Chinese demand has led the firm to invest $2.7 billion, in order to increase local production.
Unlike Volkswagen, the recovery of the U.S. market has been highly beneficial for Daimler, with sales increasing by over 9%. Things are looking great for Chinese operations as well, as China is now the largest S-Class market. By upping the local production, excise duties of 25% can be evaded, making cars more affordable for customers, and thus increasing revenue for the company.
Brand recognition is important, yet offering new products is also a great way to drive sales forward. The new CLA, for example, has lowered the entry level price for Mercedes vehicles, while helping the firm compete in a new car segment. Likewise, the new GLA-Class will allow the firm to compete in the subcompact SUV sector, a new profile for the German manufacturer's portfolio. These new introductions come as part of Daimler's overall product offensive, a strategy the firm intends on pulling through, in order to become a huge auto manufacturer such as Volkswagen.
Even though the firm has been performing very well this year, stock prices are still very low, entailing a 45% price discount rel! ative to ! the broader German auto market. Also, the 2.6% annual dividend yield is very rare in the car manufacturing industry, making this a savvy long-term investment opportunity. When investment guru Tom Russo sold his entire stake in the firm, one thing was clear, he did so to cash in on the profit, and not because he felt bearish regarding the stock. As share prices have already increased by around 39 percent so far this year, cashing in was not a bad move for the guru. I for one, feel very bullish regarding this stock's future, as there is no end in sight to its growth.
Being Smaller Is Sometimes Useful
Whereas Volkswagen may have jumped the gun with its $45 billion investments over the past years, Daimler was more prudent. Slowly gaining track in the Chinese market, it will just now invest the sum required to increase local production, and only to 2/3 of demand. A smart product offensive, which was accompanied by increases in revenue in the U.S., have not only offset negative sales in Europe, but have driven earnings forward. I feel very optimistic regarding this stock's future and the low price tags suggests a hefty profit can be made in the long run.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
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