Citi has cut its price target on Mercedes-Benz Group AG (ETR: MBG) from 51 euros to 42 euros, citing mounting profitability pressures facing European automakers in the second half of 2026. The brokerage expects the company's full-year passenger car EBIT margin in 2026 could drop below 3%.

Citi believes the pressure on Mercedes-Benz does not stem from any single factor but from multiple headwinds converging at the same time. Among them, continued deterioration in the Chinese market remains one of the biggest drags. At the same time, rising EV penetration in the European Union is forcing traditional luxury automakers to accelerate adjustments to their product mix, while global price competition in the auto sector further limits the room for carmakers to sustain margins through price increases. Rising raw material costs are also continuing to erode profitability.

Beyond that, higher interest rates globally and in Europe are driving up auto financing costs and weighing on consumer demand, while worsening residual values for internal combustion vehicles could further hurt profitability in auto finance and leasing businesses. Citi noted that after Volkswagen AG (ETR: VOW3), BMW AG (ETR: BMW) and Volvo Car AB (STO: VOLCAR-B) recently issued profit warnings one after another, the overall earnings environment for the European auto industry has clearly deteriorated. The brokerage believes Mercedes-Benz should in fact have cut its full-year guidance when it reported second-quarter 2026 results, especially after BMW issued a clear profit warning.

Based on these changes, Citi further lowered its valuation expectations for Mercedes-Benz across different scenarios. It cut its bull-case price target from 75 euros to 70 euros, while reducing its bear-case target from 40 euros to 30 euros, indicating a broad downward shift in its view of the company's earnings volatility range. More importantly, Citi now believes the earnings recovery in 2027 may not be as strong as previously expected. The market had widely anticipated that Mercedes-Benz's profitability would recover markedly in 2027 as cost pressures eased, product mix adjustments took effect and its EV transition advanced. But Citi argues that weakness in China, price competition and shifts in product mix could persist longer, limiting the pace of margin recovery.

That said, the brokerage also pointed out that the current share price already reflects a substantial portion of the negative expectations. Mercedes-Benz shares currently trade at around 40 euros, already close to Citi's new 42-euro base-case price target. So even as earnings forecasts continue to be revised lower, the market's concerns about the deterioration in the company's fundamentals have already been reflected to a large extent in its valuation. Overall, the core judgment behind Citi's price target cut is that automotive profitability in 2026 may be weaker than previously expected, and the pace of recovery in 2027 may also be slower. For Mercedes-Benz, the key to whether its valuation can rise again will not simply be whether sales volumes recover, but whether the company can restabilize its automotive business margins amid a weak Chinese market, a rising share of EVs and intensifying global price competition.