DMLRY - Mercedes-Benz Seems Countertrend As It Upgrades Its Outlook

Summary

• In this article, we are going to take a look at why Mercedes-Benz upgraded its full year outlook.
• Compared to its main peer BMW, Mercedes-Benz has undertaken another strategy that seems to deliver better results in the current environment.
• BEV sales are also speeding up, positioning the company as one of the future market leaders.

Introduction

Mercedes-Benz ( DMLRY ) chose before the pandemic to switch its business model from being volume oriented to becoming margin focused. In my previous article on the company, I showed this slide that explains how Mercedes-Benz is reshaping its portfolio, expecting decreasing overall volumes, but increase core luxury and top-end luxury sales.

In this way, the company aims at a return on sales and at higher margins that are more suitable for a luxury car manufacturer.

This is what caught my attention, since we are seeing in the automotive industry a general drop in sales. This situation should help those companies whose main goal has shifted from the number of sales to the quality of the sales. As we will see, Mercedes-Benz, unlike its main competitor BMW ( BMWYY ), posted good results for the first half and raised its full year guidance, unlike many other companies across different industries that got investors used in the past few months to cautious guidance.

1H Results

Now, in the second quarter, the company's report showed total revenues rose by 7% to €36.4 billion compared to the €34.1 billion last year. This is linked to the fact that the company’s focus on Top-End Luxury vehicles, battery electric vehicles (BEV) and premium vans helped to offset lower sales and higher raw material costs. We can see from the slide below taken from the results presentation , where sales decreased 7% while revenue increased by 8%. In addition, the adjusted EBIT rose by 20% reaching €3.8 billion, which equals to a margin of 11.1%.

As we can see, Mercedes-Benz Cars sales amounted to 487,100 vehicles in the second quarter vs the 521,200 vehicles sold in Q2 2021. Unit sales in the Top-End Luxury segment also saw a slight decrease to 75,500 vehicles vs 77,900 vehicles sold in Q2 2021.

However, top-end luxury sales decreased only by 3% compared to the 7% overall decrease, thus impacting more on profitability. BEV sales were up, too, reaching 64,000 vehicles sold.

At Mercedes-Benz Vans, 2Q unit sales were a little above prior-year levels with 100,100 vehicles worldwide vs. 98,400 in Q2 2021. Adjusted EBIT was flat YoY at €0.4 billion. In addition, customer demand for electric vans rose by 84% to 3,500 units driven by the eSprinter and eVito.

The more I look at the situation, the more I become convinced that Mercedes-Benz made some choices before the pandemic that are turning out to be very profitable in the current environment.

Let's get to the bottom line. Net profit for Q2 amounted to €3.2 billion vs. €3.7 billion in 2021. The net profit attributable to the shareholders of Mercedes-Benz Group AG amounted to €3.1 billion, down from the €3.6 billion of Q2 2021. This led to a decrease in EPS to €2.91 from €3.36 in 2021. However, the previous year included the earnings of the former Daimler Trucks & Buses ( DTRUY ) segment that is not a separate company, that I covered in this article .

Regarding industrial free cash flow, we see a decrease from €2.2 billion last year to €1.4 billion in the past quarter. The reason in simple and we have gotten used to it: inventories built up as supply chain bottlenecks slowed production down. However, the adjusted free cash flow of the industrial business was a bit better as it reached €2.1 billion compared to €2.5 billion in 2021, as we can see in the slide below.

The net liquidity of the industrial business as of June 30 amounted to €19.1 billion, down €2 billion versus the end of 2021. However, the company paid its annual dividend of €5.3 billion so we could actually say that the liquidity, net of the dividend, increased by €3.3 billion.

Let's get to the financing branch of the company: Mercedes-Benz Mobility. Unlike BMW, Mercedes saw its contract volume increase by 1%. However, the adjusted EBIT decreased significantly due to a higher cost of risk that led to an increase in credit risk reserves driven by weaker macroeconomic outlook.

Guidance

Mercedes-Benz seems confident that it will be resilient during the next months and it upgraded if full year guidance. As the company wrote in its report:

Revenue this year is now seen “significantly above” the 2021 level, up from a previously expected “slightly above.” EBIT is now seen “slightly above” the prior-year level, rather than “at the prior-year level.” Free cash flow from the industrial business is now expected to be “at the prior-year level”, from a previously expected “slightly below” the 2021 level.

Given the fact that the order books are full and that the company's focus on higher profitability is paying off, I do think this guidance is not too bold but actually quite realistic.

Valuation

In my past article, I shared the discounted cash flow model I used to reach the valuation that Mercedes-Benz was trading at a 30% discount with a target price of $66.50. I confirm this valuation as Mercedes-Benz has delivered excellent execution.

Conclusion

I got interested in Mercedes-Benz as I was researching the automotive industry trying to understand the different underlying business models to see which ones are set to perform better in an environment where supply chain disruptions, geopolitical conflicts, high energy prices are determining how business can run. I really like the fact that by concentrating on core and top-end luxury vehicles, the company has decided to sacrifice some sales in order to achieve better results. I do expect this strategy to deliver better results than most other automakers and thus I confirm my buy rating.

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