Reason 1. Automotive industry recovery

In 2022, the global automotive industry faced significant headwinds. Inflationary pressures, semiconductor shortages, and supply chain disruptions have led to a decline in passenger car sales worldwide. According to industry estimates, between 13.7 million and 13.9 million new vehicles were sold in the US last year, down by about 8%–9% from 2021 and the lowest level since 2011, when sales recovered from the Great Recession. Sales in Europe were 14.8 million units, down by 11.4% from 2021.

According to LMC Automotive forecast, the European passenger car market in 2023 will recover to around 16.1 million units, representing a YoY increase of 8.8%, but also suggesting that there is room for further recovery momentum as 20.7 million units were sold in 2019. S&P Global Mobility expects new car sales in the US to reach 14.8 million in 2023, which, although higher than a year earlier, still leaves room for growth.

The automotive industry is already showing significant signs of recovery. In March 2023, the number of new vehicle registrations in the US was 287,400, up 24.6% from February.

Registration of new cars in the US; source: Trading Economics

In the EU, the figure also rose significantly, with 803,188 units sold in April, up 17.2% from a year earlier. All major EU markets showed strong growth last month.

Registration of new passenger cars in the EU; source: ACEA

Stellantis is the fourth largest automaker in the world in terms of sales after Toyota, Volkswagen, and Hyundai-Kia. The company's brand portfolio covers all major price segments: from budget to luxury. Strong market positioning and broad brand diversification have enabled the firm to become one of the main beneficiaries of the market recovery.

Reason 2. Dare Forward 2030 strategy

In the spring of 2022, Stellantis management presented the Dare Forward 2030 strategic plan, aimed at fundamental business transformation and the company's transition to sustainable mobility. The plan includes the following goals:

By the end of the decade, Battery Electric Vehicles (BEVs) should account for 100% of Stellantis' sales in Europe and 50% of sales in the US. In addition, the company's lineup should include more than 75 electric vehicles by 2030, and their annual sales volume should reach 5 million units. For comparison, at the end of 2022, the total number of cars sold amounted to 5.8 million units.

Stellantis is committed to aggressive decarbonization. CO2 emissions are expected to be halved by 2030 compared to 2021. The company expects to achieve zero carbon emissions by 2038.

From a financial point of view, the company aims to double its revenue by 2030 to reach €300 billion ($324.5 billion at current exchange rate) while maintaining double-digit adjusted operating margins.

Stellantis intends to maintain a dividend payout ratio of 25%–30% of net income until 2025 and expects to buy back 5% of ordinary shares from the market.

Four key goals; source: Company Presentation

It is worth noting that the company has taken several actions to achieve the strategic goals. Together with Samsung, Stellantis announced the construction of a battery manufacturing plant in Indiana. The plant is expected to launch in 2025 with an initial annual production capacity of 23 GWh and a subsequent production increase to 33 GWh. The total investment will exceed $2.5 billion. This step will increase the production of electric vehicles under the Chrysler brand.

Stellantis and LG Energy Solutions plan to invest about $4 billion in lithium-ion battery production in Canada. The plant is expected to become the country’s largest with annual production capacity exceeding 45 GWh. The start of construction is scheduled for the end of this year, and the start of production is planned for Q1 2024. Stellantis and LG Energy Solutions expect the plant to be a catalyst for building a robust battery supply chain in North America.

In early April, the Wall Street Journal reported that Stellantis was in talks with Panasonic to build new EV battery factories in North America.

Stellantis plans to invest a total of about $30 billion by 2025. The expected capital expenditures assume maintaining an optimal level of free cash flow since total investments exceed the company's 2022 operating cash flow by only 40%. In addition, Stellantis is a potential beneficiary of the Inflation Reduction Act, signed into law by US president Joseph Biden in August 2022, as significant tax incentives are available for projects in the US and countries with which the US has free trade agreements (Canada is one of them).

Reason 3. Capital allocation

Stellantis currently pays an annual dividend of $1.478 per share, implying an 8.8% dividend yield based on the current stock price. Although the company has a short and volatile payout history, we believe that it will continue to distribute dividends because:

At the end of 2022, Stellantis paid out €3.35 billion ($3.55 billion) to shareholders, or 20% of the annual net income and 30% of the firm's free cash flow. In other words, the payout ratio implies a significant margin of safety.

As part of the Dare Forward 2030 strategic plan, the company's management announced its intention to maintain a payout ratio of 25%–30% of net income until 2025.

In addition, Stellantis has initiated a €1.5 billion ($1.62 billion) share buyback programme, with the first tranche of €500 million ($541 million) due by June 2023. As part of Dare Forward 2030, the company plans to buy up to 5% of ordinary shares from the market.

Financial performance

The analysis of Stellantis' financial performance is presented in US dollars (US$). The company's results for 2022 can be summarized as follows:

Revenue was $190.2 billion, up 11.9% from a year earlier. The growth is due to an increase in the average selling price. The number of units sold decreased in all key markets.
Gross profit increased from $33.5 billion to $37.4 billion. Gross margin decreased slightly from 19.73% to 19.64%.
Operating income was $21.20 billion versus $17.20 billion a year earlier. Operating margin increased from 10.12% to 11.14%.
Net income was $17.77 billion, up 18.2% from a year earlier. Net margin increased from 8.85% to 9.34%.

Dynamics of the company's financial results; source: compiled by author

Company margin dynamics; source: compiled by author

At the beginning of May, Stellantis released interim results for Q1 2023, which showed a YoY revenue growth of 14%. While revenue growth in 2022 was driven only by higher prices, in Q1 the company also increased sales by 7%, due to improved conditions in the semiconductor market.

It is worth noting that Stellantis has the highest operating margin among traditional automotive companies (only Tesla shows a higher figure, 14.82%). Due to high efficiency, the firm has a low break-even point, which allows it to successfully overcome even a deep and prolonged recession.

Comparison of operating margins of companies; source: compiled by author

Stellantis generates a steady cash flow. At the end of 2022 cash from operations stood at $21.14 billion compared to $21.21 billion a year earlier. Free cash flow increased from $11.33 billion to $12.02 billion over the same period, driven by growth in net income.

Company’s cash flow; Source: compiled by author

Stellantis has a strong balance sheet with total debt of $28.8 billion, cash equivalents and short-term investments of $51.4 billion, and net debt deeply negative at -$22.6 billion.

Stock valuation

Stellantis is an example of a deep-value company. The balance of cash equivalents per share is approximately equal to the current share price of $16.8. The net cash position (the difference between the company's cash and its debt) is $7.8 per share. In other words, liquid assets support the stock price. The company trades at a discount to peers on the following multiples: EV/Sales — 0.15x, EV/EBITDA — 1.05x, P/Cash flow — 2.43x, P/E — 2.93x, FWD P/E — 2.79x.

Comparable valuation; source: compiled by author

The minimum price target from investment banks set by Equita SIM is $22 per share. Stifel estimates STLA at $29 per share. According to the Wall Street consensus estimate, the stock’s fair market value is $24.5, implying a 57% upside potential.

Price targets of investment banks; source: compiled by author

Key risks

Stellantis is losing market share in a number of key markets, including North America and Europe. Although the company management attributes the development to logistical headwinds, the decline in market share may indicate Stellantis' inability to meet consumer preferences.

Decline in the company's market share; source: Company Presentation

Stellantis operates in a highly cyclical industry. Although we believe that the expected recession has already been reflected in the current stock price, there is a possibility that the deterioration in consumer sentiment could have a greater impact than we think. In this case, the STLA stock price may remain under pressure for an extended period.

* This investment idea is provided to you under “Investment research and financial analysis” ancillary service as per License 275/15.

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