BMW, VW and Daimler: similar and unequal

The leading German carmakers have ignored the most severe crisis of the European auto market in decades. After record results, they reckon they can cope with a worsening environment. Yet there are differences between them – which markets only partly appreciate.

At 383 billion euros, the joint annual revenue of Volkswagen, Daimler and BMW is equivalent to the gross domestic product of Belgium. The three German carmakers have defied the European automobile crisis, dubbed “carmageddon” by JP Morgan. The big three booked record revenues in 2012, increased their sales in the first quarter and reckon they can cope with a worsening environment. They are in a league of their own.

Markets, however, treat them differently – for reasons both good and bad. According to Starmine data, BMW trades at 8.4 times its expected next year’s earnings, a premium of more than a third on the European industry’s average. With a price-earnings ratio of 7.4, Daimler is only slightly cheaper than BMW. Volkswagen, however, is valued at a forward price-earnings ratio of just 5.8, trailing behind the European car sector’s average. Investors seem to put a bit too much faith in the prospects of Daimler, while they may underestimate Volkswagen’s potential.

Some premium on BMW and Daimler is justified by the fact that both sell bigger and more expensive cars – a segment more profitable than the mass market. BMW has operating margins of about 11 percent, almost twice the industry’s average. This is also the case of Volkswagen’s high-end brand Audi.

Daimler investors, on the other hand, know from experience that the production of premium cars doesn’t automatically translate into premium earnings. The company’s profitability lags behind that of its peers. The 7.1 percent operating margin of flagship brand Mercedes Benz is a third lower than BMW’s. The group is trying to address the problem but progress is slow and won’t happen in 2013. Daimler may even have to reassess its profit targets for the year.

That isn’t the company’s only headache. It also seriously trails behind its peers in China, selling half as many cars as Audi, and a third less than BMW, in the world’s fastest growing car market last year. The group only belatedly started to address its issues in that country at the end of 2012, and still has a lot to do there.

Volkswagen is a volume manufacturer and should naturally trade at a discount to its luxury competitors. Yet the size of the discount may be excessive. Compared to the wider industry as well as to Daimler, the group’s earnings power is more than decent, with an operating margin of 6 percent in 2012.

Even more important, further improvement in profitability may be in the pipeline, thanks to a new production concept that would standardise parts across its 12 brands and models. Volkswagen estimates that the new approach could end up driving costs down by up to 1,500 euros per car. Given an annual production of more than nine million cars, that means a potential 13.5 billion euro boost in profit. Even at half the official targets, the savings would be impressive.

The three companies will also benefit in the foreseeable future from their own rivalry, which keeps everyone on their toes. Markets will continue to treat them differently, but in the general German context that provides a stark contrast against gloomy Europe.

The leading German carmakers have ignored the most severe crisis of the European auto market in decades. After record results, they reckon they can cope with a worsening environment. Yet there are differences between them – which markets only partly appreciate.

This article was initially  published as a Reuters Breakingviews comment on 15 April 2013.

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