Cost Reductions And Dual Vehicle Strategy Will Improve Competitiveness In Future Markets

Key Takeaways

• Mercedes-Benz targets growth in premium segments and balances BEV and ICE strategies to maintain stable earnings amid market transitions.
  
• Cost reduction in EVs and strategic initiatives like stake monetization and partnerships in China aim to boost margins and shareholder value.
  
• Shifts in vehicle focus and brand positioning amidst regulatory, market, and economic challenges could impact Mercedes-Benz's revenue growth, competitiveness, and profitability.

Catalysts

Operates as an automotive company in Germany and internationally.

• Mercedes-Benz is focusing on elevating their product portfolio across different segments, particularly targeting growth in Core and Top-End segments, which can lead to increased revenue and margins through premium offerings.
  
• The company is adopting a dual strategy for BEVs and ICE vehicles, indicating flexibility to adapt to varying market demands, potentially maintaining revenue from its profitable ICE business while gradually transitioning to electric, supporting stable earnings.
  
• By reducing production costs, Mercedes-Benz aims to achieve a 15% cost reduction in their EVs, which could improve net margins as the company closes the margin gap between ICE and EV products.
  
• The planned monetization of the Daimler Truck stake and share buybacks signal a commitment to enhancing shareholder value and could drive expectations of increased earnings per share.
  
• Localization and partnerships in China to reduce costs and maintain double-digit margins in a competitive market can contribute to stable revenue flows and healthy profitability from the region.

Mercedes-Benz Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mercedes-Benz Group's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 7.3% in 3 years time.
• Analysts expect earnings to reach €11.0 billion (and earnings per share of €11.99) by about March 2028, up 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 €8.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the GB Auto industry at 6.5x.
• 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 shift in focus from BEV (battery electric vehicles) to include more emphasis on ICE (internal combustion engine) vehicles introduces uncertainty in Mercedes-Benz's ability to adapt to future regulatory challenges and consumer environmental preferences, potentially impacting revenue growth and market competitiveness.
  
• The company's assumption that pricing will remain stable despite global economic shifts and competitive pressures might be overly ambitious, which could lead to margin compression if cost controls or pricing strategies fail to hold, impacting net margins.
  
• The volatile nature of the Chinese automotive market and the intense competitive environment there pose a risk to maintaining current profit levels, with potential implications for future earnings and cash flow.
  
• The dependency on maintaining a premium brand positioning amidst shifts in market demand towards more affordable or technologically advanced vehicles could pressure revenue growth if the company fails to convince consumers of the added value.
  
• The uncertainty surrounding regulatory requirements, particularly in emissions standards within Europe and globally, places pressure on future investment priorities and could increase compliance costs, affecting overall net earnings and profitability.

Valuation

• The analysts have a consensus price target of €68.55 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 €47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €150.0 billion, earnings will come to €11.0 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 9.8%.
• Given the current share price of €59.95, the analyst price target of €68.55 is 12.5% higher.
• 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.