Mercedes-Benz shares slump as carmaker slashes earnings guidance on China weakness

Investing.com -- Mercedes Benz Group AG (ETR:MBGn ) slashed its earnings outlook on Thursday as the luxury automaker grapples with softer demand amid China-led macroeconomic weakness.

The company cut its adjusted return on sales forecast for its Mercedes-Benz (OTC:MBGAF ) Cars unit to range of 7.5% and 8.5%, down from its previous forecast of 10% to 11%.

"The downgrade comes amid further deterioration of the macroeconomic environment, mainly in China. GDP growth in China lost further momentum amid weaker consumption as well as the continued downturn in the real estate sector," Mercedes-Benz said in a statement.

The carmaker's shares fell more than 7% in European trading on Friday. 

Earnings before interest and taxes, or EBIT, is now expected to be significantly below the prior year level, Mercedes-Benz Group said, compared with a previous forecast for slightly below the prior-year level.

The back half of the year is expected to be impacted by various valuation adjustments, Mercedes-Benz warned, adding that "the dynamic pricing environment is expected to continue."

But there could be some macroeconomic reprieve for the automaker, analysts at Vital Knowledge argue, as the outsized Federal Reserve rate cut in September could give the People's Bank of China more flexibility to loosen monetary policy further.

Separately, Morgan Stanley analysts noted that Mercedes' recent announcement, following similar moves by BMW (ETR:BMWG ), Volkswagen (ETR:VOWG_p ), and Porsche, supports their view that "underlying auto demand keeps weakening, with few hiding places for OEMs that face price-volume pressure, driving margins lower whilst room to reduce investments is limited."

Based on the new guidance, analysts think consensus estimates for FY24 group EBIT could fall by around 20%.

Elsewhere, Stifel analysts said the guidance cut does not come as a surprise given the deterioration in the broader macro environment. However, the investment bank believes it is "incrementally negative due to the magnitude of the warning and because sentiment towards Mercedes has been more positive."

"Mercedes has so far guided for an 8-10% EBIT margin in a weak environment. That seems undermined by the warning. The lower FCF guidance also raises questions about future share buybacks," analysts added.

Yasin Ebrahim contributed to this report. 

Source: Investing.com