Just after providing a Buy recommendation to Stellantis (STLA) and Volkswagen (OTCPK:VWAGY), I have been requested to also deal with Mercedes-Benz Team (OTCPK:DDAIF)—which I will do with good pleasure. The argument for Mercedes-Benz is extremely equivalent to the argument designed for other automakers: the company appears materially undervalued dependent on accounting fundamentals. But Mercedes-Benz requires investors to pay out an business top quality because the organization features a slight benefit: As Mercedes is more and more concentrating on the luxury automobile segment, the company’s margins are far more defensible and earnings electric power fewer reliant on volume. I worth Mercedes based mostly on the residual earnings framework anchored on analyst EPS consensus estimates and work out a honest implied share cost of $104.58/share.
Mercedes-Benz Group is a top vehicle corporation from Germany. With annual revenues >$170 billion, Mercedes-Benz is ranked as the world’s 3rd greatest automotive company, generating passenger autos, vans, and professional automobiles these as transportation vehicles and buses. In addition, Mercedes-Benz also operates a monetary service arm and has partnered with BMW AG (OTCPK:BMWYY) to venture into multiple wise mobility solutions these kinds of as SHARE NOW and Cost-free NOW. For reference, SHARE NOW is a single of the world’s most significant car or truck-sharing products and services with more than 20,000 vehicles in above 30 metropolitan areas. Free of charge NOW is a experience-hailing provider related to Uber.
Mercedes-Benz operates four segments: Mercedes-Benz Automobiles, Mercedes-Benz Vans, Daimler Vans & Buses and Daimler Mobility. Notably, Mercedes-Benz Cars and Vans mixed account for >60% of the group’s revenues and Daimler Trucks & Buses is about 20% of profits. Geographically, Europe is the company’s largest sector with much more than 40% of product sales, followed by North The usa with 30% and the Asia/Pacific with approximately 25%.
About the past number of a long time, Mercedes-Benz has been rather effective in repositioning its passenger automobiles in the luxurious class. That stated, if investors hope an economic downturn and slowing purchaser sentiment, Mercedes-Benz could be very well positioned to accomplish, offsetting price inflation and sustaining earnings ability on reduced volume. Investors should really also choose take note of Mercedes-Benz drive into mass-market place mobility. Notably, in early 2020 Mercedes-Benz AG and Zhejiang Geely Keeping Team declared to sort a joint 50/50 enterprise for the advancement and commercialization of the car manufacturer Intelligent.
Mercedes-Benz has savored a solid fiscal calendar year 2021. The corporation recorded revenues of $120.6 billion, symbolizing an increase of 4.7% calendar year-more than-yr. Earnings from steady functions were $12.5 billion and net-income, including a a single-time non-operational get of $14.1 billion, was $25 billion, or $24.84/share. Hard cash furnished from functions was $29 billion.
Mercedes-Benz closed the year with $38 billion of income and dollars equivalents and $150 billion of whole personal debt. Personally, I come across Mercedes-Benz’ debt position very alarming and as desire costs are soaring, I presume the financial debt burden will incorporate major headwinds to earnings. Most notably, Mercedes-Benz leverage ratio. Whole Debt/EBIT at 9.2 is noticeably better than the exact ratio for Stellantis at 2.3.
Analyst consensus estimates that Mercedes-Benz will increase revenues at 5% CAGR right until 2025. Respectively, earnings for 2022, 2023, 2024 and 2025 are approximated at 12, 12.5, $12.82 and $13.14. I really feel these estimates are incredibly affordable.
Identical to my valuation of Volkswagen and Stellantis, I propose to use the identical valuation process to assist comparison and anchor on the parallel assumptions. That stated, I have built a Residual Earnings framework based on the analyst consensus forecast for EPS ’till 2025, a WACC of 10% and a Tv development level equal to zero. The powerful price of funds for Mercedes-Benz is considerably down below 10%, but I feel an adjustment to 10% demonstrates the firm’s substantial credit card debt exposure and aggressive company atmosphere. In addition, the extended-phrase advancement assumption equal to zero is quite cautious, but in my view it pays to be conservative when on the lookout at valuations.
Centered on the above assumptions, my valuation estimates a truthful share rate of $104.58/share, implying around 50% upside opportunity primarily based on accounting fundamentals.
If investors may well want to look at a distinct scenario, I have also enclosed a sensitivity examination based on varying WACC and Tv set progress combination. For reference, crimson cells imply an overvaluation, although green cells imply an undervaluation as compared to Mercedes-Benz’s present valuation. Most notably, all analyzed combos indicate an undervaluation.
As for other car OEMs, identical downside dangers apply to Mercedes-Benz: 1) slowing buyer self confidence globally, and especially Europe, thanks to inflation outpacing wage progress 2) geopolitical hazards such as the Ukraine war and Stellantis’ exposure to China incorporate to small business uncertainty 3) offer-chain issues like semiconductor shortages, which could turn into even much more difficult owing to the COVID-19 lockdowns in China 4) higher than expected CAPEX and R&D investments in buy to comprehend the strategic repositioning to an electrical mobility supplier 5) timid EV adoption thanks to considerations about the EV technological innovation and charging infrastructure construct-up 6) macroeconomic uncertainty relating to the monetary policy steps of the ECB and steps of the European/German government versus Russia 7) growing competition with other high quality makes these as Tesla (TSLA), Porsche (OTCPK:POAHY) or BMW could affect Mercedes-Benz pricing electricity additional than expected.
Mercedes-Benz appears undervalued, though considerably a lot less than Volkswagen and Stellantis. Nevertheless, I do think the industry premium is justified, because Mercedes-Benz luxury positioning appears much less susceptible to an financial downturn. Also, investors could want to appreciate that the implied fair circumstance concentrate on cost of $104.58/share still indicates very appealing upside likely of 50%. I conclude with a Get advice.
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