Goldman Sachs downgrades Mercedes-Benz to 'neutral' on luxury sales uncertainty

Inveesting.com -- Goldman Sachs has downgraded Mercedes-Benz (OTC:MBGAF ) Group AG (ETR:MBGn ) to "neutral" from a previous "buy" rating, citing ongoing uncertainties around the company's top-end luxury vehicle sales and challenges in maintaining earnings momentum. 

The note dated Tuesday flags structural and cyclical headwinds affecting the automaker's performance.

As per the analysts, Mercedes-Benz's fourth-quarter performance saw a slight improvement in the share of top-end vehicle sales, increasing to 15.9% from 14.2% during fiscal year 2024. 

However, concerns remain about the sustainability of this growth in 2025, especially given the aging S-Class and mixed reception of certain AMG models. 

The note also underscores that earnings from China and the broader profit streams from battery electric vehicles present risks for the company.

Goldman Sachs projects a steep 40% decline in adjusted earnings before interest and taxes for Mercedes-Benz Cars in fiscal year 2024, followed by an additional 14% drop in 2025. 

The analysts attribute this decline to weaker market dynamics, pressures from electrification, and challenges in achieving CO2 compliance. 

While the company's industrial free cash flow is expected to remain stable, thanks to disciplined investments and cost management, the luxury automaker's immediate earnings potential appears muted.

Mercedes-Benz's Capital Market Day on February 20 is flagged as an opportunity for investors to reassess the company's strategy and outlook. 

Key areas of focus will include updates on the luxury strategy, mid-term margin targets, and progress in partnerships, such as with Nvidia (NASDAQ:NVDA ) for advanced driver-assistance systems.

The analysts also revised their price target for the stock to €59, reflecting a 6.4% upside from its current trading level of €55.45. 

They noted that this valuation accounts for the uncertainties in end markets and earnings contribution from China, with the reduced target multiple of 5.5 times fiscal year 2026 earnings signaling cautious optimism.

Despite recognizing Mercedes-Benz's differentiated luxury strategy, Goldman Sachs views the short-term challenges as significant enough to warrant the downgrade to "neutral." 

The brokerage advises investors to monitor developments in key product segments, electric vehicle penetration, and market dynamics in China for potential shifts in the company's fortunes.

Source: Investing.com