Greetings everyone!
This forum lacks a thread about Mercedes-Benz, and given the company’s interesting situation, I believe there absolutely should be one. Mercedes has been in my portfolio for three years now, and I have regularly increased my holdings. To start, I should state that my interest in Mercedes-Benz is purely on the investment front, and I am not a fan of the car brand in any way. It is therefore highly unlikely that I will ever find a product of the company in my yard, but the shares will probably remain in my portfolio for a very long time. To my taste, Mercedes cars are unnecessarily expensive vehicles, and their design has never truly appealed to me. I realize that my preferences do not represent the majority of the population, and for example, in Finland, Mercedes-Benz is the dream car for both men and women. Below is a relatively recent graph from Iltalehti on the matter:
As an investor, I am a value and dividend investor. I try to find companies that grow and are able to continue increasing their dividends. Mercedes-Benz fits this category perfectly, along with a few other car manufacturers (I might open a thread about these manufacturers later). Two aspects are attractive about the company: its financial situation and its strategy. Based on its financial situation, Mercedes is a very undervalued company. The market capitalization at last Friday’s closing price is only 79 billion euros. The company is net debt-free, and its net cash position is 31.7 billion euros. The image below shows the key figures for 2023:
Mercedes-Benz’s P/E ratio is 5.5, and the dividend distributed in spring is 7%. Mercedes invests heavily in product development, but despite that, the net cash flow for 2023 was 11.3 billion euros. For the current year, the cash flow guidance is 8.5-10 billion euros. Since the cash position is very strong and investments are not expected to explode in the next few years, the entire cash flow will be distributed to shareholders through dividends and share buybacks. Mercedes-Benz has guided that the dividend will grow in the coming years. A rather significant amount of money has been allocated to share buybacks. Almost exactly a year ago, a four-billion-euro share buyback program was initiated. Of that program, 1.9 billion euros are still unused, and the assumption is that the program will conclude in the third quarter of this year. After this, a three-billion-euro continuation program will begin, ending in the second half of 2025. It is therefore clear that buybacks are being accelerated, and it is highly probable that buyback programs will continue even after July 2025. In total, the authorization is currently for buying back 10% of the share capital. Here are the points I mentioned, from an investor presentation slide:
Regarding the financial figures, I have also generally considered Mercedes-Benz’s strategy to be smart. A big change is, of course, the electrification of transport, but I have been pessimistic about its speed. Mercedes has a very strong position in the internal combustion engine segment in higher price ranges, and this market is not disappearing anytime soon. The expected dip in electric vehicle demand that has now occurred benefits more conservative car manufacturers. Mercedes-Benz has also reacted to this and announced that electrification milestones will be shifted forward by half a decade: Mercedes siirtää sähköistämistä tuonnemmas – Polttomoottorimallien tuotanto ja kehitys jatkuu | Kauppalehti . Although I am not at all enthusiastic about this, I assume that the upcoming European Parliament and political developments in the United States will not accelerate electric vehicle adoption (or the green transition in general).
During my ownership of the shares, Mercedes-Benz has made two major strategic moves. When I first bought the shares, the company’s name was Daimler. The truck division was divested into its own company, and the name changed. I quickly sold these shares I received and reinvested them back into Mercedes-Benz. Another major strategic direction is to focus on margins and shift more towards being a luxury manufacturer. This means that the offering at the lower end of the price spectrum will be scaled down. This shift is clearly visible in the average price of cars sold. While it was 51 thousand euros in 2019, it was already 74.2 thousand euros in 2023. The strategy is also illustrated on this slide:
Currently, the analyst consensus estimate, according to Marketscreener, is approximately 83.74 euros. The lowest target price is 60 euros, and the highest is 125 euros. Valuation multiples are low compared to other European car manufacturers, but I would see (or hope) that this aspect will change. It certainly doesn’t look like traditional car manufacturers are shrinking in the coming years. This assumption has already quite nicely taken hold in Toyota’s stock price this year.
. Coincidentally, we’re visiting the Merc museum tomorrow as we are returning to Finland from Southern Europe, don’t ask why…
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