When you think about luxury cars, three things that often come to mind are "expensive," "expensive," and "expensive." But for investors, it's all about profits. And when it comes to the battle of which brings in the most bang for your buck, the three top dogs in the luxury market are Daimler's (NASDAQOTH:DDAIF) Mercedes-Benz, BMW (NASDAQOTH:BAMXF), and Toyota's (NYSE:TM) Lexus. So which one could make you the most money?
The art of war
On Aug. 1, BMW reported that it sold 24,043 BMW brand vehicles in July. That's up from 21,297 for the same time last year, and an increase of 12.9% on a volume basis. BMW also stated that its best-selling car was the 3 Series, up 29.2% to 9,890 units sold.
Mercedes, meanwhile, reported that it sold 23,648 Mercedes brand vehicles, up from 19,311 for the same time last year. That's a 22.5% volume base increase. Its best-selling vehicle was the C-class, up 34.3% to 7,604 units sold.
Not to be too far outdone, Lexus reported that it sold 23,031 units, up from 18,235 from the same time last year, and a volume base increase of 25.5%. Its best-selling vehicle was the RX, up 10.1% to 8,437 units sold.
It's not all about volume
All three luxury manufacturers were close in terms of volume sales. However, there's more to evaluating a company than units sold. For example, BMW posted the best volume, but for its overall second-quarter profits, it experienced an 8.8% drop. Why? In large part BMWs profit loss was driven by its investment in its new, all-electric i3, and, more specifically, its investments to expand factories and produce carbon-fiber parts for the EV.
However, depending on how the i3 does, this could be a big win down the road. But that's a big "if." The i3 doesn't go on sale until Q2 of 2014, but if it does well, it could have a positive impact on BMWs stock. If it doesn't, then the opposite is true.
The call of China
Another factor investors should consider is China, whose premium-car market has increased by a compounded annual rate of 36% in the past decade. In fact, China's luxury auto segment is expected to climb 7% to 12% this year, which is great news for luxury-car makers. Moreover, China recently surpassed the U.S. to become BMW's largest market by sales. Even better? In 2012, BMW had a 23.6% luxury market share, which was second only to Volkswagen's (NASDAQOTH:VWAGY) Audi market share of 29.6%. That's higher than Mercedes' share of 20.6%, and significantly higher than Lexus', which has yet to gain any noteworthy share, because so far, it hasn't built a manufacturing plant in China.
The potential for sales profits in China is substantial, but that doesn't mean a Chinese venture is without risks. Just recently, BMW came under fire in China for "insufficient investment in environmental protection measures" at one of its flagship manufacturing projects that was looking to double capacity. Whether that will have a lasting impact on that specific BMW venture is uncertain, but it does highlight that there are risks when expanding into a new country.
The winner is: BMW
Last year, Mercedes took home the title of best-selling luxury brand in America -- the world's top luxury-car market. Its 2012 sales were 245,926 (up 12%), which came to 17.3% of the luxury market. However, BMWs 2012 sales were 244,061 (up 10.4%), which came to 17.1% of the luxury market. That's a mere 1,865 vehicles less than Mercedes. Lexus, by contrast, sold 213,555 units in 2012 (up 23.3%), which accounted for 15% of the luxury market.
But this year, BMW is expected to surpass Mercedes. And even if it doesn't, I still think it's one of the best bets for luxury-car manufacturers. Lexus' growth is impressive by volume, especially by a percentage basis, but because it's not actively pursuing manufacturing plants in China, its ability to grow in that market is pretty limited. BMW, by contrast, is actively pursing its venture in China, and even though it's hit some snags, the potential profitability outweighs the risks. Consequently, if I could choose only one luxury-car maker to invest in, it'd be BMW.