Take Mercedes. In 2017, it sold about 140,000 performance cars
under the AMG moniker. If these cost an average of €90,000 each, then
that translates into €12.6bn of revenue. If we then apply the assumed 15
per cent margin and take of 30 per cent for tax, the net proft to Mercedes
of its AMG division is €1.4bn. If we now apply Porsche’s multiple of 18
times earnings (when it was not consolidated into Volkswagen) the implied
market value is €24bn. That equates to about one-third of Daimler’s market
value, despite the fact that an AMG car accounts for only one in every 20
of the cars Daimler produces.
If the growth in performance cars continues in 2018, investors will
pay more attention to this theme. However, even though sales of these
cars are rising quickly, they are doing so from a small base. That makes it
likely that equilibrium has not yet been established in the market. Hence,
while 2018 will likely bring increased investor scrutiny on performance car
divisions, carmakers will likely experience increased competition.
In this case, it seems inevitable that the pricing premium for performance cars
will have to adjust to an equilibrium level as competition becomes more
intense. Eventually, this may put a squeeze on margins, particularly for
those carmakers that are lagging in their development of a diferentiated
performance car brand. For those carmakers that have established
themselves in this niche, the key will be backing up their current offering
with new cars that are just as sporty but also stand out from the crowd.
Carmakers and investors need to be aware , the reliance on a particular sector
to generate the bulk of the returns is likely to lead to issues in the
future. The portfolio theory requires a balance , thus the
sourcing of returns from a single point leads to greater risk.