Morningstar has set a fair value estimate of $125 per share for Mercedes-Benz Group AG (MBGAF), while the current trading price of $63.10 reflects a 50% discount to this valuation. Despite a difficult market environment that pressured Q3 2024 results, Mercedes-Benz remains a recognized premium and luxury automotive leader. While revenues declined 7% and EBIT fell by 48%, Morningstar maintains a narrow economic moat rating for Mercedes-Benz due to brand strength and technological prowess. With projections of gradual margin recovery over the next five years, Morningstar’s guidance is to HOLD, with continued evaluation of high uncertainty and macroeconomic risks.

Q3 Earnings Under Pressure Amid Weak Market Environment

Revenue and EBIT Decline: Group revenue for Mercedes-Benz fell by 7% in Q3 2024, largely due to a 6% revenue decrease in the car segment. EBIT dropped sharply by 48%, with the car segment’s EBIT margin declining from 12.2% in Q3 2023 to 4.7%, marking a significant year-over-year compression.

Profitability in Key Segments: In Q3, the car segment faced a 1% drop in volume, with a notable 12% decline in high-end segment volume, leading to a contraction in gross profit margins from 23% to 18%. Reduced pricing and equity impacts from the Chinese market compounded the decline.

Strategic Adjustments and Market Position

Focus on Contribution Margins: Management plans to prioritize contribution margin improvements, aiming to extract higher value per vehicle rather than relying solely on volume growth. This approach reflects the company’s adaptation to demand fluctuations in high-end markets, particularly in China.

Resilience in Cash Conversion: Despite profitability pressures, Mercedes-Benz’s cash conversion ratio improved to 2.0 times, up from 0.7 times in the prior year, reflecting effective cash flow management despite earnings setbacks.

Future Outlook and Adjustments in Fair Value Estimate

Gradual Margin Recovery Expected: Morningstar anticipates that Mercedes-Benz’s EBIT margins will stabilize around midcycle single-digit levels over the next five years, adjusting for a more competitive market environment and a modest 1% average revenue growth rate.

Fair Value Set at $125: Morningstar’s fair value estimate for Mercedes-Benz remains at $125, implying a significant upside from current levels but is tempered by high uncertainty ratings and competitive market conditions.

Disclaimer: Investors are advised to perform their own due diligence before making investment decisions.