Mercedes-Benz: Comments On The Q2 Results

1 month ago 9

IAA 2021 Munich Auto Show

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After our Q2 analysis of Daimler Truck, today we focus on Mercedes-Benz Group AG's (OTCPK:DMLRY; OTCPK:MBGAF) second quarter performance. Here at the Lab, our first article was written about the German group, and we continue to appreciate the long-term upside that the company is currently offering.

Mercedes-Benz has a simple plan: produce fewer cars at more premium prices. Our internal team found pretty fascinating the CEO's words: "we call it Haute car, as everyone knows Haute couture".

Reshaped Model Portfolio

Reshaped Model Portfolio

Q2 Results

Despite the inflationary pressure, the company reported impressive results driven by good product demand and a positive price/mix development (this was also the case in our recent publication on Volkswagen Group (OTCPK:VWAGY)). Looking at the Wall Street analyst estimates, Mercedes beats revenue growth (7% against 4%) and adj. operating profit margin (13.6% versus 12.8%). In the press release, we note that car deliveries were still impacted by supply chain constraints and semis shortages, whereas, a great performance was achieved by EVs and by Maybach.

Mercedes Q2 Results

Mercedes Q2 Results

Why are we positive?

The company also ended its three-month account with more than €20 billion in total cash (thanks also to the net automotive cash). Our internal team forecasts that the company will continue to generate strong FCF with an estimated cash conversion rate between 0.8x and 0.9x as part of its 2025 target. Even in a prolonged crisis, we are confident that Mercedes has sufficient liquidity to fund its transformational initiatives, while also continuing to remunerate the current shareholders (set on a 40% dividend based on payout ratio). Other interesting considerations are the following:

  1. Important order backlog;
  2. Clear strategy toward EV acceleration (as a reminder, Battery Electric Vehicle revenue was just negligible for the company a couple of years ago);
  3. A significant evolution in Mercedes autonomous drive capabilities.

Conclusion and Valuation

After the Q2 results, Mercedes-Benz Group raised its 2022 guidance. We estimate a 23% increase in the value of the shares compared to the current price of around €60. As for cars by 2025, in our forecast, the average price could rise to over €85k from €70k in 2021.

Mercedes brand power

Mercedes brand power

Moreover, Mercedes' stock price is trading at a significant discount compared to its 10-year historical average and, at the same time, at a minor premium versus its German competitors. Wall Street analysts are discounting: company guidance on profitability versus historical results; execution costs and higher competition in the premium segment. However, our internal team views pretty positively the Q2 results, and we see multiple support in Mercedes valuation.

Mercedes 2022 guidance

Mercedes 2022 guidance

Previous Mercedes publications and also our latest coverage on the Autos sector are below:

  1. Mercedes-Benz: German Efficiency On Full Display
  2. Mercedes-Benz: More Aerodynamic After Truck Trim
  3. Ferrari: Positive News From Its CMD
  4. Autoliv: Looking Ahead To Q2 Results

This article was written by

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Buy-side hedge professionals conducting fundamental, income oriented, long term analysis across sectors globally in developed markets. Please shoot us a message or leave a comment to discuss ideas.DISCLOSURE: All of our articles are a matter of opinion, informed as they might be, and must be treated as such. We take no responsibility for your investments but wish you best of luck.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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