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Mercedes drives toward 10% long-term profit target

Neil Winton
Special to The Detroit News

German luxury car maker Mercedes-Benz has a long-term profit margin of 10 percent, and one investor thinks it might have already achieved that in the third quarter but it might be short-lived as the global economy gyrates.

Meanwhile, a big contributor to fat profits in the future will be the new Mercedes-Maybach S600, which will make its debut at the Los Angeles car show later this month. Mercedes dumped the Maybach brand in 2012 after it failed to make inroads in the market dominated by British-based Rolls-Royce and Bentley. But Mercedes has now decided to revive Maybach as a sub-brand.

Mercedes-Benz raised earnings before interest and tax by 29 percent in the third quarter to £2 billion compared with the same period of 2013, as buyers scrambled to buy its nifty new sedans and SUVs.

Commerzbank analyst Daniel Schwarz said Mercedes’ margin was 8.5 percent in the third quarter, and asked “what stands between this and a sustainable 10 percent EBIT margin?”

“Management sees several levers – cost and production inefficiencies need to be removed, catch up with peers in China (by the end of 2015 Mercedes should have closed the gap in terms of dealers) and more cars need to be built on cost efficient modular platforms. All of this appears on track and, most importantly, in management’s hands,” Schwarz said.

Bernstein Research analyst Max Warburton thinks Mercedes may have already reached 10 percent. The trouble is, it may be derailed by circumstances out of its control.

“The good news is Mercedes is ahead of plan and has probably just hit its long standing profitability target. The bad news is that due to the macro-economic context, there’s a risk we just saw Mercedes’ margins peak. Let’s hope the global economy proves more resilient than most fear – as Mercedes and the Daimler management team surely deserves better than to have all their hard work undone by events,” Warburton said.

“We’d argue that if the global economy – and premium car demand – holds up in 2015, then Daimler will prove capable of exceeding market expectations next year. But few are going to make that call at the present time,” he said.

Meanwhile the new Mercedes-Maybach S600 will be powered by a 6.0 liter, V-12 twin-turbocharged gasoline engine producing 530 hp. It will undoubtedly make huge profits, but probably won’t sell in big numbers. No word yet on price.