Mercedes-Benz Shares Plummet After Slashing Earnings Forecast

Mercedes-Benz Shares Drop 6.8% Amid Earnings Forecast Cut

Mercedes-Benz experienced a significant 6.8% decline in its shares on Friday following a sharp reduction in its earnings forecast for the year. The company cited diminishing demand in China and ongoing trade disputes as crucial factors contributing to this downward revision. The German automaker now expects its adjusted return on sales to range from 7.5% to 8.5%, a stark contrast to the previously predicted 10% to 11%. The revised forecast underscores the impact of the "further deterioration of the macroeconomic environment," predominantly in China, where a prolonged downturn in the real estate sector has led to a decline in consumer spending. The repercussions of this economic situation have significantly affected Mercedes' sales volume in China, including its high-end segment, resulting in a weaker sales mix in the latter half of 2024 compared to the first.

This development triggered a ripple effect across the entire auto sector, with Volvo and Stellantis witnessing a 4.5% and 3.4% drop in their shares, respectively. Likewise, BMW, a fellow German automaker, faced substantial losses after revising its 2024 profit margin outlook due to similar challenges in China and complications with a braking system supplied by Continental. UBS analysts expressed that while Mercedes' adjusted forecast was not unexpected given the prevailing pressures in China, the magnitude of the warning relative to its competitors could evoke heightened apprehensions among investors.

The European auto industry is confronting mounting pressure amidst escalating trade tensions involving the EU, the U.S., and China. Germany, heavily reliant on the auto sector, has opposed EU tariffs on Chinese electric vehicles (EVs) over concerns that they could negatively impact one of its largest markets. The EU and China have agreed to engage in further discussions regarding these measures, potentially reassessing a previously rejected minimum-price agreement. This development hints at the possibility that China's negotiation strategy might be yielding results, with the EU potentially more receptive to considering measures such as quotas and minimum prices.

Key Takeaways

• Mercedes-Benz lowers its 2024 EBIT guidance, anticipating a performance "significantly below" that of the previous year.
• The adjusted return on sales forecast has been revised down to 7.5%-8.5% from the initial 10%-11%.
• Subdued demand in China and trade disputes stand as the primary factors influencing Mercedes' outlook.
• The European auto sector grapples with mounting pressure due to rising trade tensions among the EU, the U.S., and China.
• Germany voices opposition to EU tariffs on Chinese EVs, expressing fears about the potential adverse effects on its auto industry.

Analysis

Mercedes-Benz's downward adjustment in earnings, driven by weakened Chinese demand and trade tensions, underscores the broader challenges confronting the automotive sector. Particularly, German manufacturers are encountering short-term share declines and long-term profitability concerns. China's economic deceleration, compounded by real estate issues, directly impacts sales, while trade disputes complicate supply chains and market access, exerting pressure on profit margins. While EU-China trade negotiations hold promise for stabilizing markets in the long run, immediate risks remain. Investors should keep a close watch on the sector's resilience and China's economic recovery.

Did You Know?

• Adjusted Return on Sales (ROS)

  • Explanation: Adjusted Return on Sales (ROS) is a financial metric gauging a company's profitability by comparing its operating profit to its revenue. It is computed by dividing the company's operating profit by its net sales and is typically expressed as a percentage. In the context of Mercedes-Benz, the company has revised its projected Adjusted ROS from 10%-11% to 7.5%-8.5%, indicating a substantial reduction in anticipated profitability for the year.

• Carrot and Stick Approach

  • Explanation: The "carrot and stick" approach is a negotiation tactic that involves offering incentives ("carrot") to encourage desired behavior while also threatening negative consequences ("stick") to discourage undesirable behavior. In the context of the EU-China trade negotiations, China is leveraging this approach to potentially soften the EU's stance on tariffs by offering concessions while also issuing warnings of repercussions if the EU does not reconsider its position.

• Minimum-Price Deal

  • Explanation: A minimum-price deal pertains to an agreement or policy setting a floor price below which certain products cannot be sold. In the context of the EU-China trade negotiations, a minimum-price deal on electric vehicles (EVs) could serve as a measure to shield European automakers from being undercut by cheaper Chinese imports. Although the EU had previously rejected such a deal, the recent discussions hint at a potential reconsideration, which could profoundly impact the competitive landscape for EVs in Europe.