Is Mercedes Stock A Buy At $65?

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Trefis
MBGAF: Mercedes-Benz Group logo
MBGAF
Mercedes-Benz Group

Mercedes-Benz stock (OTCMKTS: MBGAF) has gained almost 20% over the last month, following a strong set of Q3 earnings and broader gains in global stock markets. Over the quarter, revenue rose almost 19% year-over-year to 37.7 billion euros (about $37.5 billion), as deliveries expanded after multiple quarters of supply chain and semiconductor supply-related issues. Mercedes-Benz car sales rose 38% year-over-year to 530,400 units, marking a sharp reversal from Q2 2022 when volumes dipped by about 6% year-over-year. Net profits also rose by about 35% to 4.0 billion euros, despite inflation-related pressures, partly due to a favorable model mix.  Mercedes has been prioritizing the delivery of more premium vehicles and trims in recent quarters with its top-end luxury vehicles accounting for 15% of overall sales over the last quarter.

However, despite the strong numbers over the last quarter, we remain neutral on Mercedes, with a price estimate of about $64 per share, which is roughly in line with the current market price. Now Mercedes stock trades at a relatively reasonable valuation of under 6x projected 2022 earnings, with revenues likely to grow by double-digit levels this year. However, there are considerable economic headwinds with the U.S. Federal Reserve and major central banks hiking interest rates to fight soaring inflation. This is very likely to result in a global recession and hit rate-sensitive sectors such as the automotive industry. The transition to electric vehicles also poses a risk to the company. Although Mercedes has made some headway on this front,  Tesla has been outselling Mercedes in the U.S. luxury market and continues to make inroads into Europe as well, with the Model Y SUV beating Mercedes’ popular GLC vehicle, to become the bestselling premium mid-sized SUV in Europe. Moreover, the barriers to entry in the EV space are also not too high, and this could mean that the company will face a lot more competition going forward.  See our analysis of Mercedes-Benz valuation for more details on what’s driving our price estimate for Mercedes Benz.

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 Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 MBGAF Return -5% 3% -18%
 S&P 500 Return 0% -15% 82%
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[1] Month-to-date and year-to-date as of 12/3/2022
[2] Cumulative total returns since the end of 2016

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