Driving Through Turbulence: German Automakers and the Path to Valuation Recovery

The U.S.-Germany trade war over automotive tariffs has reached a boiling point, with German automakers facing a 25% tariff on vehicle imports—a move justified under Section 232 “national security” provisions. Chancellor Friedrich Merz's administration has launched aggressive diplomatic efforts to resolve this impasse, leveraging Germany's commitment to boosting NATO defense spending to 5% of GDP as leverage. For investors, the question is clear: Can geopolitical maneuvering and strategic adjustments by firms like BMW, Volkswagen, and Mercedes-Benz unlock undervalued stock opportunities? Let's dissect the risks, valuations, and potential rebounds.

The Tariff Threat and Geopolitical Leverage

The U.S. tariffs are a double-edged sword for German automakers. In 2024, Germany exported 3.4 million passenger vehicles to the U.S., its largest market, generating $27.2 billion in revenue. A 25% tariff adds $4,000–$5,300 to the price of each imported car, threatening demand and profitability. For context,

, a plant critical to reducing reliance on tariffs, underscores the urgency of localization.

Merz's strategy hinges on two pillars:
1. Trade Deals: Securing a tariff reduction to 10% (as with the U.K.) via concessions like U.S. manufacturing investments.
2. Geopolitical Alliances: Aligning with U.S. priorities on Ukraine and defense spending to curry favor with President Trump.

The success of these efforts could turn tariffs from a liability into a catalyst for valuation rebounds.

Valuation Analysis: Bargain-Bin Opportunities or Value Traps?

Let's dive into the numbers. The P/E ratios of German automakers are strikingly low compared to global peers:

• Mercedes-Benz Group (MBGAF): P/E of 4.53 (vs. a 5-year median of 7.5) reflects its premium brand resilience.
• BMW (BMWYY): P/E of 5.73, slightly elevated but still undervalued relative to its U.S. manufacturing footprint.
• Volkswagen (VOW3.DE): A P/E of 0.28 signals deep distress, with losses from its legacy ICE (internal combustion engine) portfolio weighing on earnings.

Price-to-book ratios further highlight undervaluation:
- Mercedes: 0.56x (vs. a 10-year median of 0.89)
- BMW: 0.49x
- Volkswagen: 0.26x

While Mercedes and BMW trade below their book values, Volkswagen's ratio suggests the market doubts its ability to execute a costly EV transition.

Export Dependency and Strategic Adjustments

The U.S. represents 15–25% of revenue for these automakers, making tariff resolution critical. Here's how each firm is adapting:

BMW: The Conservative Play

• U.S. Exposure: 50% of its Spartanburg plant's output is exported globally, but the U.S. is its top market.
• Strategy: Aggressively negotiating tariff relief by pledging $5.8 billion in U.S. EV investments (e.g., a Rivian partnership).
• Risk: Daily losses of $11 million until tariffs ease, but its strong balance sheet offers resilience.

Volkswagen: The High-Risk, High-Reward Bet

• U.S. Exposure: Relies on Tennessee-based production and Mexican exports (now paused due to USMCA content rules).
• Strategy: Shifting focus to U.S. EV production (e.g., $5.8B in Rivian) to qualify for tariff exemptions.
• Risk: Negative earnings and liquidity pressures make it vulnerable to prolonged trade disputes.

Mercedes-Benz: The Middle Ground

• U.S. Exposure: 45% of its global exports pass through its Alabama plant, which now builds the GLC SUV for North America.
• Strategy: Balancing U.S. localization with European production to hedge against tariffs.
• Risk: Luxury car demand sensitivity to price hikes could dent margins.

Investment Considerations: Timing the Trade Deal

The key variable is Merz's progress in reducing tariffs to 10% or less. If achieved by mid-2025, expect:
1. Stock Rebounds: A 10% tariff cut could boost Mercedes' EPS by ~15%, BMW by 10%, and Volkswagen by 5% (albeit from a low base).
2. Valuation Expansion: P/E ratios could normalize to 8–10x for Mercedes and BMW, implying 70–80% upside.

Entry Points:
- Mercedes-Benz: Buy dips below €45/share (current ~€50), targeting €75 if tariffs ease.
- BMW: Accumulate at €65–€70, aiming for €100+ on a trade deal.
- Volkswagen: Avoid until profitability stabilizes; a U.S. tariff win might only narrow the valuation gap.

Risks to the Bull Case

• Trade War Escalation: Retaliatory tariffs from Europe could spark a global automotive price war.
• Defense Spending Pitfalls: Increased NATO funding (to 5% of GDP) may divert capital from R&D or dividends.
• EV Transition Costs: Volkswagen's shift to EVs and software could strain margins further.

Conclusion: A Geopolitical Pivot for Value Hunters

German automakers are trapped between a trade war and a costly EV revolution. However, Merz's diplomatic gambit—tying defense spending to tariff relief—creates a clear catalyst for valuation recovery. Among the three, Mercedes-Benz offers the best risk-reward: its strong brand, U.S. manufacturing, and undervalued P/E make it a prime candidate for a rebound. Investors willing to bet on improved U.S.-Germany relations should consider gradual positions now, with stops below key support levels.

The road ahead is bumpy, but for those who dare to drive through the storm, the payoff could be historic.

Disclaimer: This analysis is for informational purposes only. Always conduct thorough due diligence and consult a financial advisor before making investment decisions.