Big Profits for Daimler as Mercedes-Benz Sales Soar

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Sales of Mercedes' top-of-the-line S-Class have doubled in 2014, helping to drive strong profits and improved margins for parent company Daimler. A new S-Class coupe is expected to help increase sales further in 2015. Source: Mercedes-Benz.

Mercedes-Benz parent Daimler AG won't release release its full third-quarter earnings report until Oct. 23. But the German truck- and automaker gave investors an early heads-up on Tuesday:

Things are going quite a bit better than expected.

Remember how we told you 2014 was going to be down? We really meant "up"
In what it called an "ad-hoc disclosure" statement on Tuesday morning, Daimler said that its pre-tax earnings and free cash flow were both "significantly higher" in the third quarter than in the year-ago period. 

Daimler's businesses include Mercedes-Benz Cars, three separate units that make trucks and buses, and a financial-services arm. All five units posted a solid year-over-year increase in pre-tax earnings:

Source: Daimler AG. 

That had a strong impact on Daimler's free cash flow. The company's statement said that, not including the effects of "acquisitions and disposals," free cash flow of its "industrial businesses" (not counting the financial arm, in other words) was about 2.9 billion euros ($3.7 billion) in the third quarter, up sharply from 1.6 billion euros ($2 billion) a year ago. 

That's good news for Daimler investors -- but it's not exactly a surprise: The company said last week that September was Mercedes' best-ever month for sales, and that the third quarter was the "strongest quarter in the company's history." 

But Daimler's previous guidance had been much more pessimistic.

Daimler CEO Dieter Zetsche and other executives had warned that the company's plans for heavy capital spending in 2014 -- and an expected absence of one-off windfall gains that had boosted previous years' results -- would lead to a year-over-year decline in cash performance.

Daimler said on Tuesday that it is "reviewing its guidance" around free cash flow. But it did reiterate its full-year pre-tax earnings targets for its divisions, most notably saying that earnings at Mercedes-Benz Cars and Daimler Trucks would come in "significantly above" 2013's full-year results.

Here's why that's important: Zetsche has big -- and expensive -- expansion plans for the German luxury stalwart, especially in China, where Mercedes' sales are up almost 31% this year.

4 billion euro to expand further in China
Just last Friday, at a ceremony attended by German Chancellor Angela Merkel and Chinese Premier Li Keqiang, Zetsche and his counterpart from China's BAIC Motor signed an agreement to spend 1 billion euro ($1.27 billion) to expand production at their Chinese joint venture.

The joint venture, Beijing Benz Automotive, already makes Mercedes' compact C-Class and midsize E-Class sedans, along with the GLK-class SUV. This investment, part of a planned 4 billion euro in investments expected by the end of 2015, will put the new GLA-Class compact SUV into production early next year.

Mercedes' new GLA-Class is the brand's new entry into the white-hot compact luxury crossover segment. It began arriving at U.S. dealers in September, and will be launched in China next year. Source: Mercedes-Benz.

The GLA is the sport-utility sibling of the hot-selling entry-level CLA-Class sedan. It began arriving at U.S. dealers last month, and it's expected to do very well both here and in China, where sales of compact luxury crossover SUVs have been huge.

An ongoing battle for China's booming luxury market
Mercedes' China sales trail those of rivals BMW and Volkswagen Group's Audi, in part because of some now-resolved organizational issues that stunted the brand's growth for an extended period. 

Mercedes is still well ahead of China luxury upstarts like Nissan's Infiniti and General Motors' Cadillac. But with both Nissan and GM spending big to boost their luxury presence in the world's largest (and still growing) car market, Daimler is under pressure to keep pace. 

At least for now, though, the strong global demand for Mercedes' cars and SUVs is helping to ensure that CEO Zetsche has plenty of cash to fund his expansion plans.

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The article Big Profits for Daimler as Mercedes-Benz Sales Soar originally appeared on

John Rosevear owns shares of General Motors. The Motley Fool recommends BMW and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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