Is there still value in Stellantis stock?

Stellantis N.V. (NYSE: STLA), the automotive giant formed by the merger of FCA and PSA Group, is establishing itself as a key player in the global automotive industry. With a portfolio of 14 iconic and innovative brands, Stellantis covers all price segments and multiple regional markets, strategically positioning itself to address the challenges and opportunities of the rapidly evolving industry.

Stock Analysis

Stellantis stock has shown a mixed performance in recent months. Despite a 20.4% decline over the past year, negatively outperforming both the US automotive sector (-14.3%) and the broader market (+24.4%), there are signs of resilience and growth potential.
Currently, the stock is trading at €13.59, significantly below its 52-week high of €29.51. This correction offers an interesting entry opportunity for investors, considering that the stock is valued at 48.2% undervalued by various value analysts.

Market Context

The automotive sector is undergoing a profound transformation, driven by electrification, digitalization, and new mobility trends. Stellantis is responding to these challenges with a multi-energy strategy that encompasses electric, hybrid, and internal combustion vehicles, ensuring flexibility in different electrification adoption scenarios.
Growing competition, especially from Chinese manufacturers, is putting pressure on margins. However, Stellantis is taking a proactive approach, optimizing inventory and executing a generational transition of products to maintain competitiveness.

Future Outlook

Stellantis has outlined an ambitious vision through its strategic plan “Dare Forward 2030”, which aims to transform the company into a net-zero carbon mobility tech company by 2038. This plan includes:
Expansion into the electric vehicle market, aiming to reach 100% BEV passenger car sales in Europe and 50% BEV passenger car and light commercial vehicle sales in the United States by 2030.

The recent strategic partnership with Leapmotor, a leading Chinese electric vehicle startup, demonstrates Stellantis’ commitment to expanding its presence in the crucial Chinese market and accelerating its transition to electric mobility.

Investor Recommendations

Given the current valuation and long-term growth prospects, Stellantis presents an attractive investment opportunity for patient, value-oriented investors.

• Buy: For investors with a long-term time horizon and moderate risk tolerance, the current valuation offers an attractive entry point. Stellantis’ financial strength, combined with its transformation strategy, positions the company for significant gains potential in the coming years.
• Hold: For current shareholders, holding may be prudent. Despite near-term challenges, 2024 financial guidance remains positive, with expectations of double-digit adjusted operating margin and positive industrial cash flows.
• Accumulate Gradually: Given industry volatility and macroeconomic uncertainties, a gradual accumulation strategy may be appropriate to mitigate risks and take advantage of any further market corrections.

It is important to note that Stellantis offers an attractive dividend, with a current yield of 11.39%. However, investors should be aware that the dividend is not covered by free cash flow optimally, which could pose a risk to the sustainability of the dividend in the long term.

Mixed Opinions on Stellantis

Critics of Stellantis stock think it could be a potential "value trap". Here are some factors to consider:

• Persistent Low Valuation: Although the stock appears undervalued, this has persisted for some time. This could indicate that the market is correctly pricing in structural risks or long-term challenges that the company faces.
• Automotive Challenges: The automotive industry is undergoing a significant transformation, with pressure for electrification and technological innovation. If Stellantis fails to keep pace with these changes, it could find itself at a competitive disadvantage.
• High debt: Stellantis has a significant level of debt, which could limit its financial flexibility and ability to invest in new technologies or respond to market shocks.
• Dependence on mature markets: A significant portion of Stellantis’ revenues come from mature automotive markets such as Europe and North America, which may have limited growth prospects.
• Margin pressure: Intense competition and rising costs for innovation could erode profit margins in the long term.
• Regulatory risks: Increased environmental and safety regulations could impose significant additional costs.
• Uncertainty over electric transition: Despite ambitious electrification plans, the recent decline in electric vehicle sales raises questions about the company’s ability to effectively execute this transition.
• Potentially unsustainable dividend: The high dividend yield may not be sustainable in the long term, especially if cash flows deteriorate.
• Post-Merger Complexity: The integration of FCA and PSA could prove more complex and costly than expected, delaying the expected benefits of the merger.
• Currency Exposure: Stellantis’ global presence exposes it to currency risks that could negatively impact its financial results.

These factors suggest that, despite its apparent undervaluation, Stellantis may be a "value trap". Investors should carefully evaluate whether the company can overcome these challenges and realize the potential value that its low valuation multiple suggests.

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Full Electric Risk

Despite Stellantis’ ambitious projections for the transition to electric, the company has recently seen a significant decline in electric vehicle sales. In the second quarter of 2024, Stellantis suffered a 21% decline in overall sales in the United States, with the electric vehicle segment being particularly impacted. This decline reflects the challenges the company is facing in adapting to changing market dynamics and consumer preferences.
The decline in electric vehicle sales can be attributed to several factors:

• Delays in the launch of key new electric models
• Increasing competition from Chinese manufacturers and other established brands
• Consumer concerns about charging infrastructure and vehicle range
• Potential misalignment between product offerings and market expectations

This trend highlights the importance for Stellantis to review and potentially adapt its electrification strategy to better align with current market conditions and consumer needs. The company will need to address these challenges to maintain its competitiveness in the rapidly evolving automotive industry.

Stellantis could represent an attractive investment opportunity in the automotive sector, offering a mix of value, growth potential, and dividend yield. However, investors should carefully monitor the execution of the company’s strategy and the evolution of the competitive environment in the global automotive sector to avoid it turning into a classic "value trap".

|DISCLAIMER
The information and considerations contained in this article should not be used as the sole or main basis for making investment decisions. The reader retains full freedom in his or her investment choices and full responsibility in making them, since only he or she knows his or her risk appetite and time horizon. The information contained in the article is provided for information purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public to save.|

Original article published on Money.it Italy 2024-09-16 15:04:33. Original title: C’è ancora valore sul titolo Stellantis?