Mercedes surprised during recent testing at Barcelona's Circuit de Catalunya where Hamilton and team-mate Nico Rosberg finished third and first respectively on the overall timesheet.
Given Mercedes' alarming dip towards the end of last year, it would appear the German manufacturing giant have taken giant strides in a bid to become title contenders this season.
In signing Hamilton on a £15million-per-year contract for the next three seasons they also have a headline act to keep them in the hunt, and potentially to also spur on close friend Rosberg.
"Mercedes have recorded some head-turning times with the programme they were operating to," said Horner, when asked by Press Association Sport about their testing performances.
"Their car looks quick, and with Lewis joining the team they will naturally take a step forward.
"Their challenge will be sustaining it over a whole season as they have been quick the last couple of years at the beginning - winning the third race last year in China.
"But Lewis, as we all know, is a world-class driver, and he is going to raise their level.
"He is worth lap time, which is why they signed him, and I'm sure they're going to be a factor this season."
After winning the last three drivers' and constructors' championships it would be easy for Red Bull to rest on their laurels as they bid to make it four in a row.
Horner maintains, though, they have no intention of allowing their crowns to slip, knowing they will come under intense pressure from Ferrari, McLaren, Mercedes and Lotus over the coming 10 months.
"Any pressure is what we put ourselves under," added Horner.
"Having won three double world championships is something fantastic and something every member of the team is extremely proud of.
"They're in the history books now. Nobody can take them away from us, and we've shown we're not a flash in the pan as people thought of us after our first double championship.
"So in many respects the pressure is off, but in others we want to maintain the roll we have been on over the past few years.
"There is a real determination within the team to keep this run of success going, to do our very best to defend both of those titles this year."
Even without a wheel turning in anger yet, with the first race in Australia now just 11 days away, Horner has already been impressed by what he has so far seen from his own team.
For Horner, it underlines there is no complacency, adding: "This is our ninth year in Formula One.
"That desire and determination within the team has been one of our strengths over the years.
"Even if we've won a race we've looked inwardly and said 'Where can we improve?' and 'Where can we continue to develop?'
"There is this real philosophy throughout the organisation that showed up over the winter,
"Last year, given the title race went down to the wire in Brazil, it meant we were developing all the way through.
"The knock-on effect was that the amount of design and production time we had for this year's was the shortest for all the cars we've produced so far.
"Yet the car hit the first test on time, was reliable and looked reasonably quick out of the box.
"The way the team is working as a group, and with the stability we have had across all areas, that is hugely important to us."