Nobody Told Mercedes-Benz About Elon Musk’s Price War
- German brand reports a strong first quarter, but investors are still waiting for the great reset
There was no sign of Tesla’s price war in first-quarter results from Mercedes-Benz, but investors are still betting a tougher market will catch up with the luxury brand.
Mercedes-Benz reported an operating margin of 14.8% in its flagship car division, among other quarterly highlights, after the market closed on Thursday. The surprise numbers came ahead of its scheduled quarterly results day on April 28, in line with German law that requires it to release results early if they are substantially different from the analyst consensus. For the first time in a few quarters, the operating margin compares favorably with the 11.4% level reported by Tesla on Wednesday, which would have been 9.4% excluding regulatory credits.
All of Mercedes-Benz’s divisions reported better results than expected except the unit that handles car loans and leases. Rising interest rates and falling residual values are squeezing profits from vehicle finance across the industry. The biggest beat at Mercedes-Benz was in industrial free cash flow, which came in at €2.2 billion, equivalent to about $2.4 billion, versus expectations of €1.2 billion.
The shares jumped at the open, but by lunchtime in Frankfurt they were more or less flat. The reality is that investors see the fat margins Mercedes-Benz has made in recent quarters as a transitory phenomenon caused by the pandemic vehicle shortage. Even if transitory inflation in profits can take a long time to subside, nobody wants to jump in before the drop.
Tesla’s price cuts in recent months are in part a sign of the times, as higher interest rates make cars less affordable. But there are also specific factors at play: Elon Musk’s EV maker is ramping up capacity, forcing it into a growth-at-all-costs strategy, and the new U.S. tax credits for EVs also favor a mass-market strategy. Mercedes-Benz isn’t subject to all the same pressures, particularly since it doubled down on the luxury end of the market last year.
The stock carries a 7% dividend yield and trades for under six times earnings, compared with 20 times for its only slightly more profitable crosstown rival, Porsche. If Mercedes-Benz can use its strong brand to get through the next few years—the normalizing vehicle market, the price wars, the expensive shift from gas engines to EVs—with its profitability more or less intact, it will surely be rewarded with a much higher valuation. That would make its stock a buy for the ages at today’s level.
Given the uncertainties in an industry increasingly steered by the whims of Mr. Musk, though, investors’ apparent reluctance to jump aboard is understandable.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
