By Stephen Wilmot 

The road is unusually clear for luxury-car makers today, but there is traffic ahead.

Daimler reported a first-quarter operating profit of about EUR5.7 billion early Friday -- its highest quarterly number in at least 15 years -- thanks to a high-octane performance from its Mercedes-Benz car division. The company reported key numbers ahead of full quarterly results next week because they were running far ahead of analysts' expectations.

The report continues the trend set by a very strong final quarter of 2020 for all of Germany's car makers. Customer demand has bounced back from last year's pandemic-related shutdowns much faster than vehicle production and manufacturers' fixed costs. As a result, car makers have far more pricing power over consumers than usual in an industry better known for overproduction.

The German players have the added benefit of big businesses in China, where the post-Covid recovery is looking firmly entrenched. The widely reported shortage in auto chips also seems to be affecting them less than it is Detroit. That could change in the second quarter, but if it does that might simply extend the current period of undersupply and high vehicle prices to the manufacturers' advantage.

This gives investors good short-term reasons to own Daimler stock, which rose 3% in morning trading Friday, as well as its peers BMW and Volkswagen. But the horizon is clouded by the emergence of electric-vehicle technology. Mercedes's profits are driven by the brand's most pollutive sport-utility vehicles and top-end sedans, not by the EVs it needs to sell in increasing numbers to satisfy regulators and compete with a new breed of U.S. and Chinese competitors such as Tesla, NIO and Xpeng.

On Thursday evening, after months of teasers, Mercedes took the camouflage off its new flagship EQS model, a high-end electric sedan that it is pitching as the EV equivalent of its top-of-the-range S-class. This is the start of a multiyear push that will test consumers' appetite for prestige EVs designed by the inventor of the gasoline engine.

Investors currently seem confident that Daimler will make the transition without much grating of gears -- even that it will thrive. After roughly tripling since last year's lows, its market value is now equivalent to almost half of its annual revenue, higher than the 10-year average. At the same time, Tesla and EV startups such as Lucid Motors are raising billions of dollars of capital based on valuations that assume they will take market share away from the likes of Mercedes.

As the road gets more congested, there are bound to be disappointments -- and probably some crashes.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

 

(END) Dow Jones Newswires

April 16, 2021 09:11 ET (13:11 GMT)

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