Mercedes-Benz Group's Strategic Turnaround: Can “Next Level Performance” and Share Buybacks Rebuild Long-Term Value?

Mercedes-Benz Group AG, long a symbol of automotive prestige, finds itself at a crossroads. The luxury automaker has faced a sharp decline in earnings and revenue in recent quarters, with adjusted EBIT for its Cars division falling to €8.7 billion in 2024 (from €14.3 billion in 2023) and Group revenue contracting to €145.6 billion. The company's “Next Level Performance” strategy, launched in 2024, aims to reverse these trends through cost-cutting, operational efficiency, and product innovation. But with market headwinds—including a struggling Chinese market, supply chain bottlenecks, and aggressive competition from EV upstarts—investors must ask: Can this strategy and its accompanying share buyback program restore long-term value, or are they merely delaying the inevitable?

The “Next Level Performance” Strategy: A Double-Edged Sword

Mercedes-Benz's strategic overhaul hinges on six pillars: cost reduction, production flexibility, enhanced customer experience, electrification, technological unification, and capital allocation. The most concrete targets include a 10% reduction in production costs by 2027 and a return to a double-digit adjusted RoS margin for the Cars division. On paper, these goals are ambitious but not unrealistic. The company has already slashed fixed costs and renegotiated supplier contracts, which should yield incremental savings. However, the strategy's success depends on two critical factors: the ability to execute across a sprawling global supply chain and the timing of product launches.

The product pipeline is a key lever. Mercedes-Benz plans to roll out 12 new BEV models by 2026, including all-electric versions of the GLC and C-Class. These models are critical for capturing market share in the EV segment, where Tesla and Chinese rivals like BYD are rapidly gaining ground. The CLA's 2025 launch, in particular, is a test of the company's ability to blend design innovation with cost discipline. If these vehicles fail to resonate with consumers, the strategy's financial targets could slip further out of reach.

Financial Realities: EBIT Declines and a Shrinking Margin of Safety

The data tells a sobering story. In Q4 2024, Mercedes-Benz's Cars division reported an adjusted RoS of 8.1%, down from 12.6% in 2023. While the Vans division held up better (adjusted RoS of 14.6%), the overall Group EBIT dropped to €13.6 billion, a 29% decline from 2023. This erosion in profitability is compounded by a challenging capital structure. The company's share buyback program, which aims to redeem up to €5 billion over 24 months, is aggressive given the cash outflows for dividends and R&D. For context, in 2024 alone, the company allocated over €10 billion to dividends and buybacks, despite a free cash flow of just €9.2 billion—a 19% drop from 2023.

The buyback program is a double-edged sword. On one hand, it signals confidence in the company's ability to generate cash flow and stabilize its valuation. On the other, it risks depleting liquidity at a time when the company needs capital for R&D and production retooling. The proposed dividend cut—from €5.30 to €4.30 per share—also reflects a pragmatic acknowledgment of the current earnings environment.

Strategic Risks and Market Realities

The automotive industry is undergoing a seismic shift, and Mercedes-Benz is not the only player struggling to adapt. Its rivals, particularly Tesla and Chinese EV manufacturers, are leveraging agile supply chains and lower-cost production to outpace traditional automakers. Meanwhile, the company's reliance on premium ICE models—still accounting for a significant portion of sales—is a vulnerability as global regulators and consumers increasingly favor electrification.

China, Mercedes-Benz's second-largest market, has been a particular drag. Sales declines in the region (down 15% in Q4 2024) highlight the company's struggle to compete with local EV brands that offer comparable performance at lower prices. The “Next Level Performance” strategy's focus on modularization and a unified tech stack is a step in the right direction, but it will take years to fully realize these benefits.

The Investment Case: Caution and Opportunity

For long-term investors, the key question is whether Mercedes-Benz's strategic initiatives can outpace the headwinds. The company's cost-cutting measures and production efficiency gains are tangible steps, but they may not be sufficient to offset the declining EBIT and revenue. The share buyback program adds value by reducing the number of outstanding shares and potentially boosting EPS, but its effectiveness depends on the company's ability to maintain free cash flow.

Mercedes-Benz's stock has underperformed the broader automotive sector in 2024, with a 5% gain in early 2025 despite the company's strong liquidity position. This suggests that the market remains skeptical about its ability to restore profitability. However, the company's long-term moats—brand equity, R&D capabilities, and a robust global distribution network—remain intact. If the “Next Level Performance” strategy can deliver on its 2027 targets, the stock may offer compelling value for patient investors.

Conclusion: A High-Stakes Transformation

Mercedes-Benz Group's strategic turnaround is a high-stakes gamble. The “Next Level Performance” strategy and share buyback program are designed to stabilize the business and restore investor confidence, but they must contend with structural challenges in the automotive industry. For now, the company's free cash flow and liquidity provide a buffer, but the path to profitability is far from guaranteed. Investors should monitor key metrics—particularly the success of 2025 product launches and the trajectory of EBIT recovery—before committing to a long-term position. In a sector defined by rapid innovation, Mercedes-Benz must prove that its legacy of luxury and engineering can adapt to the future.