GM - Stellantis Is A Strong Buy Based On Valuation And Dividend

2024-01-18 05:12:56 ET

Summary

• Stellantis trades undervalued to peers despite high profit margins from global synergies and has historically paid out a large April Dividend.
• Stellantis is making waves in the automotive industry with its strategic initiatives, including an aggressive electrification strategy, global market focus, and digital innovation driving growth in 2024.
• Potential risks such as supply chain vulnerabilities, economic sensitivity, strikes, partnership transition challenges, and intense competition should be considered as potential downside drivers.

Strong Auto Sales Push Stellantis' Stock Higher

Stellantis (STLA), a global automotive powerhouse formed through the merger of Fiat Chrysler Automobiles and Peugeot S.A., has positioned itself as a significant player in the rapidly evolving automotive industry. Since we last covered Stellantis, the stock has delivered a total return of around 35% and has been on a hot streak over the last 6 months in particular as auto sales take off . With markets near all-time highs despite high inflation and interest rates, investors must balance these complexities with undervalued and proven names. Stellantis' stock has garnered attention for its potential. In this analysis, we explore the reasons why Stellantis' stock is a strong buy at its current valuation. Through the outlined recent news showcasing the company's strategic moves, valuation metrics, and potential risks, investors can gain insights into the compelling investment case for this automotive giant.

Stellantis has been making waves with strategic initiatives and transformative steps in recent quarters. Stellantis has outlined ambitious plans for electric vehicle ((EV)) production, aligning with the global shift towards sustainable transportation. The company aims to invest heavily in EV technologies, capitalizing on the growing demand for environmentally friendly vehicles. Most recently, STLA showed their dedication to electrification through a strategic partnership with Leapmotor out of China (Figure 1).

Figure 1. STLA's investment in Leapmotor shows the group's ability to diversify in the high-upside EV market

Expanding upon Stellantis' diversification strategy, the blockbuster FCA PSA merger and now growing partnerships have positioned Stellantis as a truly global entity, combining the strengths and market reach of FCA and PSA and now seeking an expanding reach in China. Further investments in names such as Archer Aviation (ACHR) push Stellantis' upside higher. Recent moves reflect a strategic focus on expanding market share in key regions, leveraging the diverse brand portfolio within the Stellantis umbrella by maintaining an industry-leading valuation without losing high upside potential. Stellantis recognizes the importance of digitalization in the automotive industry, taking technological aspects from each of its brands and working towards verticalization and integration of key features. The company has been actively investing in digital initiatives, including connectivity features and advanced driver assistance systems, reflecting a commitment to staying at the forefront of technological advancements. This innovation combined with undervaluation and a strong 6%+ dividend yield position Stellantis for future success in an increasingly competitive automotive landscape. Further tailwinds such as easing strikes set STLA up for another 33%+ upside in 2024 in our opinion.

Industry Leading Stock Valuation

Examining Stellantis' valuation involves a comprehensive assessment of various factors influencing its market standing alongside competitors. At first glance, Stellantis boasts a diverse brand portfolio, encompassing iconic names like Jeep, Ram, Peugeot, and more. The strength of this portfolio contributes to the company's ability to appeal to different consumer segments and withstand market fluctuations. Shipments have grown in recent quarters (Figure 2) with easing economic headwinds and are expected to grow in 2024. Stellantis already trades at a dirt cheap 3x price to earnings well below other undervalued peers such as General Motors (GM) and Ford (F) and this valuation (Figure 3) will continue to become cheaper with growth unless the stock balloons upwards.

Figure 2. New car sales are up globally, benefitting Stellantis all around

The merger of FCA and PSA has generated cost synergies and operational efficiencies for Stellantis that are just beginning to take shape. This integration allows the company to streamline operations, reduce costs, and enhance overall competitiveness in the automotive market, resulting in heightened profitability (Figure 3). The merger which has saved the company an estimated $5.7 billion in production costs since 2021 should continue these savings through leveraging of volume pricing from suppliers and optimization of efficiency within their wide footprint of plants. To put that in perspective the company posted an annual net income of ~$21 billion so that would indicate as much as a 20% increase in profits if these synergies continue to generate savings. This 3-headed dragon of undervaluation, accelerating growth & profits, and the anticipated annual dividend which is expected to hit this spring provide a strong case to dip your toes into STLA's stock at current prices.

Figure 3. STLA has industry-leading profit margins yet trades at a discount to peers

We believe a fair valuation would be closer to where GM trades around 4.5-5x earnings, which would indicate roughly 27% upside. Pair that with the 6% dividend and you reach our price target of 33% upside by mid to late 2024. This falls roughly in line with Wall Street Analyst targets, which indicate the stock has ~37% upside.

Risks

While Stellantis presents a very promising investment case, it's essential to consider potential risks associated with the automotive industry. Like many automotive companies throughout COVID and now beyond, Stellantis faces supply chain challenges, including semiconductor shortages and geopolitical uncertainties impacting the availability of critical components. These disruptions can affect production schedules and revenue. The automotive sector is sensitive to economic cycles as well. Economic downturns can lead to reduced consumer spending on vehicles, impacting Stellantis' sales and revenue. The company's valuation is influenced by global economic conditions, which are currently in a rough spot at 5%+ interest rates. The transition to electric vehicles and digitalization poses challenges. Delays in technology development, changes in consumer adoption rates, or unforeseen hurdles in the EV transition could impact Stellantis' strategic plans and financial performance. Investments in names such as Leapmotor and Archer may provide high upside opportunity but also open Stellantis up for significant losses. Lastly, the risk of strike is not fully overcome yet. Workers are still slowly trickling back to STLA plants and until back at full force, Stellantis will have the potential for unforeseen quarterly misses. Overall, if we had to put a number to Stellantis' downside, there appears to be a pretty solid floor around the $18.50 mark signialling as much as 15% downside barring any headwinds.

Indubitable Information

"In God we trust. All others must bring data" - Robert Hayden

Exploring intriguing facets of Stellantis adds depth to the understanding of its history and impact. Stellantis brings together a rich tapestry of historical legacies from FCA and PSA, incorporating brands with storied histories. This amalgamation not only strengthens the company's brand portfolio but also adds cultural richness to its identity. Stellantis plans to offer over 75 electric vehicles by 2030 across 14 of these brands showing an unparalleled drive towards electrification. Stellantis has been a hub of innovation, contributing to automotive advancements. From the introduction of groundbreaking vehicles to pioneering technologies, the company's legacy reflects a commitment to staying ahead in the rapidly evolving automotive landscape.

Conclusion

In conclusion, Stellantis emerges as a compelling investment opportunity at its current valuations, propelled by its strategic focus on electrification, global market presence, and innovative initiatives. Recent news underlines the company's commitment to addressing industry shifts and embracing digitalization and the impact these can have on growth and profitability. We believe with current tailwinds and the upcoming annual dividend, Stellantis offers 27-33% upside with just 10-15% downside.

The valuation of Stellantis is influenced by the strength of its brand's ever-growing portfolio, cost synergies from the big merger and partnerships, and aggressive plans for electric vehicle production. While potential risks such as supply chain vulnerabilities, strikes, and economic sensitivity exist, we cannot predict the short-term direction of the stock, but believe STLA to be one of the best cyclical investments you can make in 2024 based on valuation and the dividend you will get paid to wait for the picture to take shape.

For further details see: