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Patricio Kehoe
Patricio Kehoe
Articles (164) 

Calling All Cars: Automotive Sales on the Rise

September 12, 2013 | About:

Although car sales have suffered significantly in the past due to the financial crisis and its aftermath, this trend is now being reversed. Despite the immense differences between Daimler AG (DDAIF) and Tata Motors (NYSE:TTM) in terms of reputation and history, these two firms are looking at a bright future.

German Expertise

Daimler is a premium car and commercial vehicle manufacturer with a global reach. Despite setbacks due to the financial crisis, Daimler has counteracted car sales depression and continues to thrive thanks to its anti-cyclical premium brand Mercedes-Benz. Stability and controlled growth are the reasons the Government Pension Fund of Norway recently increased its stake in Daimler. Having such an investor has reassured me, that I am not wrong in feeling optimistic about the firm’s future.

As vehicle demand normalizes, Daimler’s cost-cutting initiatives have contributed to strong profits in 2013, freeing up money for future developments. Elevated demand from China, as well as a resurging of sales in the US, will benefit the company significantly in coming years. Nevertheless, declining sales in Europe will continue to trouble the German car manufacturer, which makes 50% of its earnings in the old continent. Also, in the short term, spending is bound to increase.

Global environmental legislation is already pushing the firm towards higher development costs for efficient combustion and zero emission engines. In the long term, however, Mercedes-Benz’s brand equity and a projected increase in Chinese sales will limit the firm’s exposure to economic cycles. Furthermore, a European recovery, along with the announced product offensive strategy, will contribute to the company’s growth.

Daimler does not have any serious financial worries, since it is currently debt-free. However, one-time investments in model makeovers have reduced the company’s cash flow significantly, leaving little room for new self-financed projects. Daimler AG is currently trading at 9.2 times its earnings ttm, resulting in a 34.2% price discount to the industry average. Considering future prospects for the company along with the reputation of its premium brands, I feel bullish about this stock.

Indian Growth

India’s largest car manufacturer Tata Motors has a wide portfolio, ranging from compact cars to commercial trucks and buses. Apart from offering affordable vehicles, the firm acquired the premium brand Jaguar Land Rover in 2008. Tata Motors caught my attention when Schroder Investment Management doubled the shares it holds in the firm a few months back.

Tata Motors derives its strength from its share of the Indian commercial vehicle market and its growing sales in Asia. Yet the company has also entered the premium vehicle segment with the purchase of Jaguar Land Rover. This move has allowed Tata Motors to increase its global market participation and optimize its production process, as well as diversifying its portfolio. Tata Motors’ affordable vehicles constitute the core of the company’s growing sales, with the premium brand contributing to a further increase in revenue. Expanding luxury markets in emerging countries, along with increasing automotive sales in India, will benefit Tata Motors significantly in coming years. However, the firm must alert, as strong competition in the domestic passenger vehicle segment has already begun to erode its market share.

Significant increases in revenue over the past years and a great reduction in debt have strengthened Tata Motors financially. Tata Motors is currently trading at 6.0 times its earnings ttm, entailing a huge price discount to the industry average. Considering India’s economic growth rates and Jaguar Land Rover’s recent sales volumes, I think this stock is worth keeping an eye on.

Orient on the Rise, but Stability Preferred

After years of uncertainty following the financial crisis, investing in the automobile industry has once again become an option. Tata Motors and Daimler have seized the opportunities presented by fast growing emerging markets and are both positioning themselves for a great performance in coming years. Tata Motors entails a higher risk than Daimler, due to the cyclical nature of its customer base, and I consider it to be less stable in terms of sales and finances.

Disclosure: Patricio Kehoe holds no position in any stock mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.4/5 (5 votes)


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