EXXRF - Vltava Fund - Stellantis: The Best Investments Are In Stocks That Everyone Underappreciates
2023-07-05 05:00:00 ET
Summary
- Stellantis, the fourth-largest car company in the world, is undervalued by the market, according to an investment analysis.
- The company, a merger of Fiat Chrysler and Peugeot, has high margins and is expected to grow sales from EUR 180 billion to EUR 300 billion by 2030.
- Despite a strong dividend yield of 8.5% and share buybacks, the stock is trading at three times annual earnings, making it an attractive investment opportunity.
The following segment was excerpted from this fund letter.
Stellantis N.V.
The best investments are not in stocks that everyone praises, but in stocks that everyone underappreciates. That in one sentence sums up our investment in Stellantis ( STLA ). This company is itself very young, but its individual components have very long and interesting histories. I will just briefly describe how the company came to be.
In 2009, the American carmaker Chrysler went through bankruptcy, and the Italian automaker Fiat became one of the main shareholders – at that time with a 20% stake. Under the leadership of its CEO, Sergio Marchionne, Fiat gradually increased its holdings until, in 2014, it came to own 100% of the shares.
The newly formed company, called Fiat Chrysler, began trading on the stock exchange. It was clearly underappreciated by the market (including us) even then, but the stock has done very well since – and especially when you add in the performance of Ferrari ( RACE ), which was spun off from Fiat Chrysler in 2016.
Two years later, Sergio Marchionne died, and John Elkann, the grandson of Gianni Agnelli (Fiat) and CEO of Exor ( OTCPK:EXXRF ), the main shareholder of Fiat Chrysler, became the prime mover of events. In 2021, John Elkann initiated the merger of Fiat Chrysler with the French carmaker Peugeot ( OTCPK:PEUGF ), thereby creating Stellantis, the fourth-largest car company in the world.
Ownership control is held by the Agnelli (via Exor) and Peugeot families. The company’s CEO is the highly respected automotive veteran, Carlos Tavares.
We think we are once again in a situation where the market is deeply undervaluing Stellantis stock. Consider for yourself: Stellantis is a solid business. It has some of the highest, if not the highest, margins in the industry, and that is before savings from the integration of Peugeot and Fiat Chrysler are fully realized.
Management plans to move from the current level of EUR 180 billion in sales to EUR 300 billion by 2030. So, it is a decently profitable and growing business. We can also find net cash (cash minus debt) of EUR 23 billion on its balance sheet.
The individual Stellantis brands (Alfa Romeo, Chrysler, Citroen, Dodge, Fiat, Jeep, Maserati, Ram, Opel, Lancia, Vauxhall, Peugeot, and others) cover different market segments – from the very low end to luxury – as well as different regions. Peugeot is strong, for example, in France, Germany and Britain, but also in Argentina. Fiat, for instance, in Italy, but also in Brazil. We consider the management to be excellent and the controlling shareholders to be very responsible.
In the capital allocation story, dividends and shares buyback play big roles. That all looks good. So, what is the market telling us through the share price? The stock is trading at three times annual earnings. If you subtract net cash, which is close to half the market capitalization, you get to 1.5 times annual earnings. That valuation is, in a word, crazy. Add to that a dividend yield of 8.5%, plus share buybacks, and the stock would still be cheap even at twice the price.
All in all, after 15 years of watching developments, we have run out of excuses not to buy the stock. It would be a shame not to take advantage of this opportunity.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Vltava Fund - Stellantis: The Best Investments Are In Stocks That Everyone Underappreciates