Daimler AG – Buy

UBS has recently raised its 2012 S&P 500 price target to 1,525 on the belief that the near term liquidity-driven rally will continue. Over the short-run, they believe that pro-cyclical groups such as energy, materials, autos, homebuilders and diversified financials are likely to lead the market.

With that in mind, we have looked at the auto sector, where Goldman Sachs sees 44% upside potential. In periods of increasing equity risk premia, well-positioned companies with sector-leading returns tend to outperform. Autos have shown the highest earnings momentum of any sector in the European market over the last one and a half years. Still, Goldman Sachs states that European autos is by a significant margin the least expensive cyclical sector in the region.

Our pick of the sector is Daimler AG. The company looks to be in the right place at the right time and the stock’s low valuation (8x P/E) and high dividend yield (6%) certainly sets a floor to the share price. Added to that the sectors earnings momentum and low valuation, and we see the stock poised for a period of strong share price performance ahead. Goldman Sachs has a €98 price target, 153% above the current level. Whilst this seems fanciful, even Citi’s more conservative €45 price target points to 22% possible upside.