Mercedes-Benz Shares (MBG) Slide As Year Starts Slow

Mercedes-Benz Group shares (ETR:MBG) are 0.74% higher this morning, having fallen 1.45% following yesterday’s earnings announcement, though the stock remains down 7.10% year-to-date as markets digest a challenging fiscal 2025 marked by steep profit declines and intensifying headwinds in China.

The German automaker reported net profit of €5.33 billion for the full year, down 48.8% from 2024, while revenue fell 9.2% to €132.2 billion amid global tariffs, foreign exchange pressures, and fierce competition in its largest market.

The Mercedes-Benz Cars division bore the brunt of the downturn, with adjusted EBIT tumbling to €4.8 billion from €8.7 billion the prior year. The adjusted Return on Sales compressed to 5.0%, well below management’s medium-term target of 8-10%, as lower volumes in China and adverse pricing conditions weighed on profitability. Fourth-quarter earnings per share came in at €1.43, less than half the €2.57 recorded in the same period a year earlier, underscoring the magnitude of the challenges facing the luxury automaker.

Product Offensive and Divisional Performance

CEO Ola Kaellenius struck a cautiously optimistic tone, highlighting the launch of more than 40 new models over the next three years as a catalyst for recovery. Strong early demand for the new CLA, GLC, and S-Class models suggests the product offensive is resonating with customers, even as the company navigates a dynamic market environment. The rollout includes class-leading innovations such as the MB.OS operating system and a new point-to-point assisted driving system, positioning Mercedes-Benz to compete more aggressively in the technology-driven premium segment.

Not all divisions struggled equally. Mercedes-Benz Vans maintained a robust adjusted Return on Sales of 10.2%, exceeding full-year guidance and delivering adjusted EBIT of €1.75 billion despite competitive pressures. Meanwhile, Mercedes-Benz Financial Services outperformed expectations with an adjusted Return on Equity of 9.7% and adjusted EBIT of €1.267 billion, supported by higher portfolio margins and efficiency gains.

Aggressive Restructuring and Cost Discipline

The company’s strategic response centres on aggressive cost discipline and operational restructuring. Management is targeting a 10% reduction in production costs per vehicle by 2027 compared to 2024 levels through a combination of higher automation, artificial intelligence deployment, and optimised logistics. Global production capacity will be adjusted to approximately 2.2 million units by 2028, with assembly at the COMPAS Joint Venture plant in Aguascalientes, Mexico, ending in 2026. German production capacity will stabilise at 900,000 units, while the Kecskemet facility in Hungary will scale up to 400,000 vehicles.

Fixed costs are expected to decline 10% between 2024 and 2027, supported by a personnel cost reduction programme launched in 2025, a reduction in management positions, outsourcing of non-core activities, and the sale of company-owned retail operations in Germany. Material costs are projected to fall approximately 8% by 2027, rising to 10% beyond that date, as the company strengthens its local-for-local approach and leverages sourcing from best-cost countries.

Navigating the China Market and Future Outlook

China remains a critical battleground. With a customer base of 7 million, Mercedes-Benz is expanding local R&D partnerships with firms including Momenta and ByteDance to accelerate innovation tailored to Chinese preferences. The company is targeting a 10% reduction in local material costs, a 20% cut in variable production costs, and a 20% decrease in fixed costs versus 2024 levels by 2027, alongside continuous network optimisation.

For fiscal 2026, Mercedes-Benz expects group revenue to remain flat year-over-year, with group EBIT seen significantly above 2025 levels due to prior-year restructuring charges. Group free cash flow of the industrial business is projected slightly below 2025 levels. The adjusted Return on Sales for Mercedes-Benz Cars is guided at 3-5%, below the medium-term target, while Vans is expected to deliver 8-10% and Financial Services a 10-12% Return on Equity.

At the Annual General Meeting on April 16, 2026, the Board of Management and Supervisory Board will propose a dividend of €3.50 per share, signalling confidence in the company’s ability to navigate near-term headwinds while executing its transformation agenda. Morgan Stanley maintained an Overweight rating on the stock with a price target of €73, citing expectations of margin recovery and stronger electric vehicle demand.

Markets appear to be weighing the severity of the profit decline against the credibility of the restructuring plan. The modest uptick following earnings suggests cautious optimism that Mercedes-Benz can stabilise margins through cost discipline and product momentum, though sustained recovery will depend on execution in China and the success of the ambitious launch programme.