FRANKFURT (Reuters) -Mercedes-Benz cut its full-year profit margin target for the second time in less than two months, joining a growing number of rivals that are blaming a weakening Chinese car market, the world’s largest.
The news, disclosed late on Thursday, sent shares in the German luxury carmaker 7.5% lower to their weakest level in nearly two months, also dragging down European car stocks.
With GDP growth in China losing momentum due to weaker consumption as well as a continued downturn in the real estate sector, the company cut its earnings outlook for 2024 for both Mercedes-Benz (OTC:) Cars and the Mercedes-Benz Group.
“There is a tremendous amount of cautiousness, I’m trying to say this diplomatically,” CEO Ola Kaellenius told analysts in a call following the announcement, adding it was not surprising that spending for expensive capital goods was pared back in such an environment.
“How long will that go on? I don’t know, but I remain cautious for the foreseeable future on China.”
The continuing weak demand for luxury cars in China had prompted the Stuttgart-based carmaker to already trim its outlook in July.
Mercedes-Benz Cars now expects an adjusted return on sales to be between 7.5% and 8.5% in 2024, down from 10% to 11% previously, implying an expected adjusted return on sales of around 6% for the second half of the year.
As a result, Mercedes-Benz Group’s earnings before interest and taxes (EBIT) are now expected to be significantly below last year’s level of 19.7 billion euros ($22 billion), compared with a forecast for a slight drop previously.
According to LSEG estimates, the group’s EBIT is expected to come in at 15.83 billion euros.
“While some investors had been anticipating a profit warning … we still view this news as a surprise, especially given the magnitude and lack of cautionary commentary ahead of today’s news,” RBC analysts said.
Free cash flow for the group’s industrial business, too, is expected to be significantly less than the previous year’s level.
Last week BMW (ETR:) also flagged ongoing muted demand in China affecting sales in the country, adding to the group of automakers facing difficulties in the world’s second-biggest economy.
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