- Ticker: STLA.US
- Current price: $12.3
- Target price: $21.60
- Growth potential: 75.6%
- Potential dividend yield: 9.5%
- Time Horizon: 12 months
- Risk: Moderate
- Position size: 3%
Stellantis N.V. (STLA) designs, manufactures and sells vehicles under the Abarth, Alfa Romeo, Chrysler, Citroën, DS, Dodge, Fiat, Fiat Professional, Jeep, Maserati, Ram, Opel, Lancia, Vauxhall, Peugeot, Teksid and Comau brands. The company sells its vehicles directly or through distributors and dealers in more than 130 countries and also offers retail financing, leasing and rental services.
What's the idea?
- The company's Dare Forward 2030 strategic development plan will enable Stellantis to stay ahead of market trends such as electrification, autonomy, the growing role of software and the emergence of vehicle-to-vehicle interconnectivity.
- The new agreement with Punch Powertrain aims to meet the growing demand for electric vehicles. In addition, the Turin plant will house the main centre for the Stellantis closed-cycle economy, which will be launched in 2023.
- Due to its high efficiency, the company has a low break-even point: 40% of current capacity utilisation. Even in the event of a deep crisis, Stellantis would remain profitable.
- With a stock price of $11.80, the balance of cash equivalents per share is around $15. Usually such valuations are typical for companies with deep financial problems. However, Stellantis has no such problems.
- Stellantis has a strong balance sheet and high margins. In addition, the company provides shareholders with a solid dividend yield.
Why might the stock go up?
Reason 1. Strategic planning
Back in 1960, the American economist Theodore Levitt published an article in the Harvard Business Review entitled 'Marketing Myopia'. In it the author analyses the activities of the leading companies in various industries, which ultimately ended up in decline. The reason is the inability of companies to identify trends in their sectors, and as a result their competitive moat is collapsing.
The automotive industry is an established industry with few significant players, of which Stellantis ranks eighth. However, this market is undergoing profound structural changes. According to PwC research, the following trends will characterise the automotive market in the coming years:
- The growing role of software
- Forming a relationship between the vehicles
The Dare Forward 2030 strategic plan, unveiled by Stellantis in spring 2022, addresses each of these trends. The company's management does not seem to be suffering from marketing myopia. The plan specifically calls for the following:
- By the end of the decade, Battery Electric Vehicles (BEVs) should account for 100% of Stellantis' sales in Europe and 50% of its sales in the US. In addition, the company's lineup should include more than 75 electric vehicles by 2030, with annual sales of 5 million units. By comparison, all cars sold in 2021 amounted to 6.5 million units.
- In 2024, technology platforms are expected to be launched that will form the basis of a new digital architecture for electric vehicles called STLA brain software. This service-oriented framework, fully integrated into the cloud, could significantly improve the autonomy of the lithium-ion vehicle while reducing maintenance costs for customers.
- Financially, the company intends to maintain a dividend payout ratio of 25%-30% of net profit until 2025 and also expects to buy back up to 5% of its ordinary shares from the market.
It is worth noting that Stellantis is already taking action to achieve its strategic goals. The company has entered into a new agreement with Punch Powertrain that will boost production of electrified dual-clutch transmission components and plug-in electric vehicles hybrids. In addition, the Turin plant is preparing to launch the main Stellantis closed-loop economy centre in 2023, which is expected to generate €2 billion by 2030.
Reason 2. High efficiency
While other major automotive companies are under margin pressure due to inflation and supply chain issues, Stellantis increased its operating margin to an all-time high of 14.1% for the first half of 2022 and 11.7% for the last 12 months (TTM) in the latest reporting period. Stellantis thus enjoys the highest operating margins in the automotive industry.
Due to its high efficiency, Stellantis has a low break-even point. According to management, the breakeven point is at 40% of current capacity utilisation. This provides the company with considerable resilience, which will enable it to successfully weather even a deep and prolonged recession.
Reason 3. Solid dividend yield
Stellantis provides its shareholders with a high dividend yield of 9.5%. We expect the payout to at least remain at current levels. As noted above, as part of the Dare Forward 2030 strategy, management has voiced its intention to maintain a payout ratio of 25%-30% of net income through to 2025. According to the Wall Street consensus, the expected earnings per share (EPS) will be $5.56, $4.68 and $4.52 for 2022, 2023 and 2024, respectively. With a payout ratio of 25%, the dividend per share would be around $1.39, $1.17 and $1.13.
Stellantis' financial performance has been uneven in recent years, due to the company's activity in the mergers and acquisitions market. The results for the last 12 months can be summarised as follows
- TTM revenue stood at €164.8 billion, up 10.3% on 2021. North America was the main contributor to the growth momentum, with sales up 17.2% to €81.7 billion.
- At the end of the last reporting period, gross profit increased by 13.2%: from €29.5 billion to €33.4 billion. Despite inflationary factors, the gross margin increased from 19.75% to 20.27%.
- Operating profit increased by 19.9%: from €15.1 billion to €18.1 billion. The operating margin rose from 10.11% to 11.68%.
- Net profit rose by 8.5%: from €14.2 billion to €15.4 billion. However, net margins fell from 9.50% to 9.34%, driven by higher net finance costs due to the cost of currency hedging in Argentina, higher interest rates in Brazil and the application of hyperinflation accounting for entities whose functional currency is the Turkish lira.
The financial results for the first half of 2022 are as follows:
- Revenue rose by 21.2% year on year, from €72.6 billion to €88 billion. Sales increased in all markets except Europe, where it fell 1.2% to €31.3 billion. Sales in North America were €42.4 billion, 39.5% higher than in the comparable period last year.
- Gross profit rose by 26.6% on the year, from €14.3 billion to €18.1 billion. The gross margin rose by 0.87 percentage points, from 19.70% to 20.57%.
- Operating profit was €10.3 billion, up 41.1% on the previous year. The operating margin increased from 10.06% to 14.06%.
- Net profit rose from €6.8 billion to €8 billion. Net margins declined due to higher net finance costs: from 9.37% to 9.09%.
At the end of the latest reporting period, TTM operating cash flow was €22.9 billion compared with €18.7 billion at the end of the year. Free cash flow to equity rose from €8.6 billion to €13.4 billion.
Stellantis has a strong balance sheet with total debt of €21.1 billion, cash equivalents and short-term investments of €24.7 billion and net debt of - €3.6 billion.
A deep value company
Stellantis is an example of a deep value company. At a stock price of $11.80, the cash equivalent balance per share is around $15. Investors are not willing to pay even three annual earnings (P/E — 2.4x) for the company. Stellantis’ stock has come under selling pressure along with the rest of the market, resulting in the company trading at a substantial discount to average valuations in the auto industry despite its strong balance sheet and high margins.
Ratings of other investment banks
The minimum price target from investment banks set by BNP Paribas is €16 per share. Societe Generale values STLA at €28. By consensus, the fair market value of the stock is €21.60, suggesting an upside of 75.6%.
- The automotive industry is highly cyclical. As a rule, car sales decline significantly in times of crisis. The impact of the economic slowdown is already having an impact on Stellantis' financial performance in Europe. Thus, management forecasts that revenue in the region will fall by 2% year-on-year at the end of the year. Although the expected recession could have a negative impact on the company's sales, in our view this risk is more than reflected in the current stock price.
- The semiconductor shortage continues to hit the automotive industry. Production at Stellantis' two largest plants in Italy, Melfi and Sevel, fell 17% and 37% respectively in the first half of the year. Semiconductor shortages are one of the key uncertainties for investors in automotive stocks. However, thanks to its low breakeven point, Stellantis has ample headroom.
How to take advantage of the idea?
- Buy shares at a price of $12.3
- Allocate no more than 3% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
- Sell when the price reaches $21.60.