UBS Analysts Downgrade Mercedes-Benz, Upgrade BMW

Analysts at UBS, in a note dated Tuesday, have shifted their European automotive coverage, downgrading Mercedes-Benz (OTC:MBGAF) Group AG to "neutral" while upgrading BMW (ETR:BMWG) to "buy."

UBS now views BMW as the top pick in the European Original Equipment Manufacturer (OEM) sector, citing its stronger outlook for cash returns, stabilizing margins, and an undervalued stock relative to its peers.

Downgrade of Mercedes-Benz

• UBS’s downgrade of Mercedes-Benz reflects revised expectations for the company’s near-term performance, lowering the target price from €72 to €55.
• This downgrade comes due to significant challenges in Mercedes-Benz's core business, particularly in China, where a slowing economy and weaker consumer demand put pressure on performance.
• Analysts predict sharp margin dilution in the initial rollout of new vehicle platforms like modular architecture and MB.EA electric platforms, despite their long-term potential.
• A tough 2025 is anticipated for Mercedes-Benz, with earnings per share forecasted to decline by 10-12% and EBIT margins projected to fall between 6-8%.
• The company’s free cash flow may drop from over €8.5 billion annually to around €6 billion, which will further pressure stock performance.
• Despite these challenges, UBS recognizes that Mercedes-Benz's capital allocation strategy, notably share buybacks, could provide some support to its stock price.

Upgrade of BMW

• UBS analysts have upgraded BMW to a "buy" rating, setting a new price target of €83, up from €75.
• BMW distinguishes itself with consistent free cash flow and strong returns to shareholders. It is expected to stabilize its auto EBIT margin in 2025 at 6-8%, with potential upside in cash returns from its shareholder returns policy.
• A major driver of BMW’s future growth is its "Neue Klasse" vehicle platform, scheduled to launch in late 2025, which is expected to drive top-line and EBIT growth starting in 2026.
• BMW’s superior positioning for compliance with European CO2 regulations means less reliance on margin-dilutive electric vehicle sales and a better hedge against U.S. import tariffs on European cars compared to its competitors.
• Risks remain, particularly related to the Chinese market, but BMW’s lower fixed cost base in its joint ventures provides some protection against margin erosion from lower volumes.