Mercedes-Benz stock (OTCMKTS: MBGAF) has had a relatively strong year so far, with its stock up by almost 16%, roughly in line with the S&P 500. Mercedes has been benefiting from robust demand from wealthy customers for its high-end vehicles. For Q2, Mercedes saw the sales of its top-end vehicles reach 84,800 units, marking a 12% increase versus last year driven by stronger demand for Maybach, G-Class, and AMG models. Mercedes EV business also appears to be gaining some traction, with deliveries more than doubling over Q2. The more favorable product mix is helping the company’s profitability as top-end vehicles have significantly higher margins. While Mercedes has yet to report Q2 financials, operating margins for the car division stood at 14.8% over the last quarter and it’s possible that the metric could trend still higher in Q2, as inflation has been cooling off.
However, despite a relatively strong sales mix in recent quarters, we remain neutral on Mercedes stock, with a price estimate of about $78 per share, which is only marginally ahead of the current market price. Now, although Mercedes stock trades at a relatively reasonable valuation of about 6x projected 2023 earnings, there are a couple of risks that the company faces. Although fears of a U.S. recession have eased a bit, given cooling inflation, and a strong labor market, high-interest rates remain a negative for rate-sensitive sectors such as the automotive market. We also believe that the transition to electric vehicles also poses a risk to Mercedes. Although Mercedes battery electric vehicles for Q2 stood at 56,300, Tesla
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