UBS analysts have adjusted their ratings in the European automotive sector, downgrading Mercedes-Benz Group AG to a "neutral" rating and upgrading BMW to "buy." This change reflects a reevaluation of the companies' near-term performance and market positioning.
Mercedes-Benz faces challenges in its core business, particularly in the challenging Chinese market, where economic slowdown and reduced consumer demand are impacting sales. UBS has lowered its target price for Mercedes-Benz, indicating a cautious outlook for the company. The introduction of new vehicle platforms is expected to initially dilute margins due to substantial investments required for technology and infrastructure. This transition period is expected to be particularly tough, with forecasts predicting a decline in earnings per share for 2025.
Despite these challenges, UBS acknowledges Mercedes-Benz's ongoing capital allocation strategy, particularly its share buyback program, as a potential support for its stock price. However, greater clarity on earnings will be essential for restoring investor confidence.
On the other hand, UBS's upgrade of BMW is based on the company's ability to generate consistent free cash flow and deliver strong returns to shareholders. The new price target for BMW reflects a positive outlook for the automaker. Analysts expect BMW's auto EBIT margin to stabilize in 2025, driven by slightly higher revenues.
A key driver of BMW's future growth is the anticipated launch of its "Neue Klasse" vehicle platform in late 2025. While initial margins may be modest due to launch costs, UBS forecasts that this platform will significantly contribute to top-line and EBIT growth starting in 2026. BMW's efficient capital allocation strategy positions it favorably to tackle industry challenges.
The contrasting trajectories of Mercedes-Benz and BMW highlight the evolving dynamics within the European automotive sector. The challenges faced by Mercedes-Benz may lead to a reevaluation of investment strategies, while BMW's strong cash return potential and strategic initiatives position it as a compelling investment opportunity.