GM - Mercedes-Benz Profit Surge And Lead In Assisted Driving Make It Attractive

Summary

• Mercedes-Benz Group AG Q4 and full-year revenue surged; profit rose on 16% higher revenue following a corporate restructuring that separated cars and trucks.
• 2023 EBIT is expected to be “slightly below” the 2022 level due to “challenging market environment.”.
• Drive Pilot, certified in Nevada, becomes the first SAE Level 3 autonomous technology in the U.S., available in 2024 S Class and EQS sedans.
• Mercedes-Benz Group AG shares and ADRs look attractively priced based on dividend proposal, to be considered at the May annual meeting, of 5.20 Euros.

Mercedes-Benz Group AG ( MBGAF , MBGYY ) has long attracted luxury automotive customers based on the engineering, prestige, and design reputation of high-priced car models such as its flagship S-Class sedan. Investors were never as enthusiastic about the stock, possibly because of the confusing Daimler AG corporate name, which meant little in markets outside of Europe. The former Daimler AG was also heavily invested in big trucks, which made the company harder to analyze in comparison to pure carmakers.

The automaker solved its identity and labeling puzzle in 2021 by separating into two companies: Mercedes-Benz Group AG focused on cars and vans; Daimler Truck Holding AG ( DTRUY ) has Mercedes as a major shareholder.

Very smart! Like Ferrari ( RACE ), Ford ( F ), and Toyota ( TM ), the Mercedes car brand - highly esteemed among elite names - now serves as the name of the carmaker's stock.

Perchance to dream

No doubt, CEO Ola Källenius hoped that Mercedes, an automaker migrating toward electrification, might borrow some of Tesla, Inc.'s ( TSLA ) P/E magic as well. So far, that hasn't happened; the share price has fallen about 10% in the last year, currently selling at an anemic P/E of six. Tesla's P/E is currently a hair below 60.

Still, the financial results since the split are impressive, evidenced by the fourth-quarter and 2022 year-end results released early Friday. YOY revenue is up 16% for the quarter, 12% for the year. Net income is up 63% for the quarter, 34% for the year to a robust 14.8 billion Euros. Global car sales rose 5% for the year to 2,040,719 - 149,227 or 7.3% of which were battery-electric vehicles (BEVs).

Return on sales for 2022 was nearly 15%, a reflection of the relative profitability of luxury vehicles compared to lower-priced models. Most global automakers struggle to achieve an 8% return on sales.

As for 2023 :

The company is taking a prudent view and sees unit sales of Mercedes-Benz Cars at the prior-year level. Overall Top-End vehicle sales are expected to be slightly above prior year, thanks to new additions to the portfolio, including the new EQS SUV and later the Mercedes-Maybach EQS SUV. Sales of battery electric vehicles ((BEV)) are expected to approximately double. The adjusted Return on Sales ((ROS)) is expected in the range of 12% to 14%. Net pricing is expected to be slightly positive. Based on current assumptions it is targeted to compensate inflation-related cost increases, supply chain interruptions and one-time commodity charges. The used vehicle business is expected to be slightly negative versus 2022.

Drive Pilot arrives

Mercedes-Benz engineering prowess has translated into a breakthrough in autonomous tech, namely the SAE Level 3 certification in Nevada of its Drive Pilot feature. This allows limited autonomous driving under certain conditions. With Drive Pilot - already legal in Germany since last May - a motorist can safely turn the driving function over to the vehicle at speeds up to 40 miles per hour, typically in a situation such as heavy traffic and only on a limited access freeway.

Mercedes says the system, though limited for the time being, can operate safely at up to 80 mph.

"In the modern world, time is one of the most precious commodities, and giving back time to our customers is a core element in our strategy to build the world's most desirable cars," the automaker said in a press release . "Our DRIVE PILOT takes a major step forward in achieving that, and places us at the very forefront of innovation in the crucially important field of automated driving."

Mercedes stipulates, however, that the driver must be prepared to take over if the system recognizes an emergency or some anomaly. Otherwise, the car comes to a stop, turns on the emergency flasher, and opens the door locks to accommodate a first responder.

The feature will be available later this year as an option on the 2024 Mercedes S Class and the 2024 EQS battery-powered sedan. The automaker has applied for certification in California and expects to do so across the U.S.

Game changer?

Autonomous driving, although lagging behind early forecasts as to how quickly it can be achieved, carries significant legal and financial implications for global mobility enterprises. Several China-based and other startups are pursuing the innovation, which eventually could take drivers entirely out of the equation - though experts disagree whether that's possible. Development costs are high - Ford Motor Company (F) recently closed its Argo AI unit dedicated to autonomous.

Tesla has come under heavy criticism in the wake of several accidents for marketing its advanced driver assistance system ((ADAS)) as "full self-driving." On Thursday, Tesla said it is voluntarily recalling 362,758 vehicles equipped with the company's experimental driver-assistance software, which is marketed as Full Self-Driving Beta or FSD Beta, in the U.S. Tesla's notice said the software may cause crashes; the company said it will deliver an over-the-air software update to cars to address the issues.

General Motors Company's ( GM ) Cruise affiliate is operating a small fleet of driverless robotaxis in San Francisco and plans to expand to other locations. GM sees robotaxis as a major source of future income. GM also offers on some of its models a Super Cruise option, which allows drivers to take their hands off the wheel and feet off the pedals on limited access highways, though eyes must be kept on the road. Super Cruise and Ford's similar Blue Cruise are rated at SAE Level 2.

The Mercedes system relies on radar, LIDAR, camera, and advanced mapping features, in addition to other sensors. With Drive Pilot, Mercedes could be setting itself apart from the competition in the luxury field - and also setting the bar for other luxury makers that now will face pressure to offer a similar feature.

The year-end financials came with an announcement that the management and supervisory boards will propose a 5.20 Euro annual dividend at the company's annual meeting in early May. Assuming the dividend is adopted, that would translate to nearly a 7% yield at the current share price. An income-oriented investor could buy today and sell in three months - or hang on if the shares continue to recover.

The biggest risk for Mercedes-Benz is consumer resistance to BEVs, particularly in the U.S. But the automaker has answered Americans' worry about the lack of a robust charging infrastructure by committing in January to build its own chargers in the U.S. - a strategy that has worked well for Tesla.

I rate Mercedes-Benz Group AG common shares and the ADRs a Buy.

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