Product Expansion And Efficiency Efforts Will Strengthen Future Prospects For German Automaker

Key Takeaways

• The company's product expansion and operational efficiency efforts are set to boost revenues, margins, and overall earnings, with a focus on high-demand models.
  
• Strong shareholder return strategies and stable high-end vehicle demand, notably in China, suggest confidence in future earnings and revenue growth.
  
• Challenging macro environment and supply chain issues, with reduced EV demand and China market struggles, threaten revenue growth and profit margins.

Catalysts

Operates as an automotive company in Germany and internationally.

• Mercedes-Benz is undertaking an unprecedented product offensive, which is expected to lead to future growth by expanding their product lineup, potentially increasing revenues via new model introductions, such as the CLA and all-electric vehicles like the AMG with YASA engine technology.
  
• The company is focusing on extracting more potential from its most desirable products, which could lead to increased revenues and improve net margins by optimizing their product mix and customer offerings.
  
• Mercedes-Benz plans to enhance operational efficiencies and cost improvements across the business, which may improve net margins and positively impact overall earnings through reduced operational expenses.
  
• Mercedes-Benz's strategy to maintain a strong shareholder return framework, including dividends and share buybacks, is likely to support EPS growth and may indicate confidence in future cash flow stability and potential earnings improvement.
  
• The expected stabilization in demand for high-end vehicles, especially in markets like China, can lead to improved sales figures and pricing power, which may enhance revenue and positively impact the company's earnings in the future.

Mercedes-Benz Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mercedes-Benz Group's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 7.5% in 3 years time.
• Analysts expect earnings to reach €11.7 billion (and earnings per share of €12.54) by about December 2027, up from €10.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €7.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2027 earnings, up from 4.9x today. This future PE is lower than the current PE for the GB Auto industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.2%, as per the Simply Wall St company report.

Mercedes-Benz Group Future Earnings Per Share Growth

Risks

• The macro environment has deteriorated and the competitive landscape remains demanding, impacting sales and contributing to lower-than-expected volumes, unfavorable mix, and softer pricing. This could affect revenue and net margins.
  
• Sales for Top-End vehicles were impacted by a softer mix, especially due to the challenging economic situation in China, which could affect future revenue growth.
  
• Electrified vehicle sales were down 15%, indicating subdued demand for EVs, which could impact revenue and the company's ability to meet regulatory compliance targets in the future.
  
• There were significant warranty cost phasings and dealer supports needed in China, reflecting underlying operational and market challenges that could continue to affect net margins.
  
• The company anticipates higher material costs due to onetime supplier payments, reflecting ongoing supply chain challenges that could negatively impact profitability.

Valuation

• The analysts have a consensus price target of €68.51 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 €45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €155.6 billion, earnings will come to €11.7 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 9.2%.
• Given the current share price of €55.69, the analyst's price target of €68.51 is 18.7% 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.