New EV Models Will Energize Operations Despite Tariff Uncertainty

Key Takeaways

• Aggressive electric vehicle launches and technological innovations are expected to drive revenue growth and enhance brand value through increased sales and premium pricing.
  
• Efficiency measures and production optimization aim to improve margins and safeguard future earnings amid changing trade policies and operational cost reductions.
  
• Shifting trade policies, economic volatility, and competitive pressures in key markets could significantly impact Mercedes-Benz's profitability and market positions amidst costly technological investments.

Catalysts

Operates as an automotive company in Germany and internationally.

• Aggressive vehicle launch plans, including new electric vehicle models like the all-electric GLC and more than 25 launches planned for '25 to '27, which could drive future revenue growth through increased sales volume and market share.
  
• Efficiency and structural measures being implemented to make the company faster, leaner, and more agile, expected to improve net margins by reducing operational costs.
  
• Technological advancements like Steer-by-Wire and cooperative steering, aimed at maintaining Mercedes-Benz's reputation for safety and innovation, could enhance brand value and support premium pricing, positively impacting revenue and margins.
  
• Investment in expanding the charging network and new BEV models, aiming for an xEV share of 20%-22%, which is anticipated to drive revenue growth and meet increasing consumer demand for electric vehicles.
  
• Initiatives to optimize global production footprint and adapt to changing trade policies, which may protect future EBIT by improving cost efficiencies and ensuring accessibility despite tariff uncertainties.

Mercedes-Benz Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mercedes-Benz Group's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.0% today to 6.4% in 3 years time.
• Analysts expect earnings to reach €9.4 billion (and earnings per share of €10.48) by about May 2028, down from €10.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €13.0 billion in earnings, and the most bearish expecting €7.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, up from 4.9x today. This future PE is greater than the current PE for the GB Auto industry at 5.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

Mercedes-Benz Group Future Earnings Per Share Growth

Risks

• The shifting trade policies and new tariffs between major markets like the U.S. and China could significantly impact Mercedes-Benz's financial performance by reducing profitability and affecting revenues due to increased costs associated with production and export.
  
• The high level of uncertainty and volatility in the macroeconomic environment, particularly in China, poses a risk to demand and could negatively influence revenue forecasts and market positions.
  
• Increased competitive pressures in the global automotive market, especially in key regions like China and Europe, may affect Mercedes-Benz's ability to maintain market share and price stability, impacting net margins.
  
• The potential need for significant capital investment to adjust supply chains and production footprints to mitigate tariff impacts could affect future earnings and cash flow availability for other strategic initiatives.
  
• The ongoing transformation and investment in new technological developments, such as electric vehicles and autonomous driving features, require significant expense and pose financial execution risks, potentially influencing net margins and cash flow if market adoption does not meet expectations.

Valuation

• The analysts have a consensus price target of €66.264 for Mercedes-Benz Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €106.0, and the most bearish reporting a price target of just €46.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €147.4 billion, earnings will come to €9.4 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of €52.47, the analyst price target of €66.26 is 20.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.