2023-11-07 01:32:07 ET
Summary
- Stellantis is trading at low financial metrics compared to other automotive peers, presenting a buying opportunity.
- The company has shown strong revenue growth and profitability, with record-breaking figures in revenue, profit, and free cash flow.
- STLA aims to become a leader in the electric vehicle market, with plans to launch 75 electric models by 2030 and strategic investments in battery production.
- In the longer term, a spinoff of Maserati might unlock hidden value.
Introduction
Stellantis (STLA) is a very well-managed leading company in the automotive industry. Despite being one of the biggest automotive groups with a global presence, it is trading at financial metrics that are absurdly low. This is compared to other peers in the sector who also trade at low levels (industry median of 6x P/E according to investing.io ). The reasons for the low sector valuation are obvious. There are many uncertainties in the automotive sector for the running decade: a revolution of electric vehicles, competition from Asian producers, high-risk premiums in financial markets, and economic turmoil lurking around the corner (automotive is considered cyclical). But despite the uncertainties the outlook for Stellantis is still excellent. In the past, I was a big fan of PSA group before it merged with Fiat-Chrysler, and am now still very bullish on Stellantis. The company has created a lot of shareholder value in recent years while growing at a strong pace both in terms of revenue growth and profitability. The shares are simply too cheap to ignore and have not been re-rated for the post-merger global footprint of the fusion group. In the meantime, the company is hitting records in terms of revenue, margins, profit, and free cash flow by selling more vehicles, increasing prices, and rigorous cost-controlling. Below is a financial snapshot of the value you get at the current share price ($20.7) at the time of writing).
Financials
• Market Cap: 57.5 Bn €
• Net Financial Position: 29.8 Bn € net of cash
• Enterprise Value: 26.7 Bn €
• FY 2022 Operating Income (EBIT): 23.3 Bn €
• FY 2022 Net profit: 16.8 Bn €
• FY 2022 Free Cash Flow: 10.8 Bn €
• (Estim.) 2023 Operating Income (EBIT): 28.1 Bn €
• (Estim.) 2023 Net profit: 19.5 Bn €
• (Estim.) 2023 Free Cash Flow: 12.1 Bn €
Valuation metrics
• Price-to-earnings: 3.16
• Price to Free Cash Flow: 5.3
• EV/EBIT: 1.15
• Forward P/E: 3.4
• Dividend yield: 6.9%
Stellantis Group
Stellantis group originated from the merger between PSA group (Peugeot, Citroen, Opel) and Fiat-Chrysler (Fiat, Alpha Romeo, Dodge, Ram, Chrysler, Jeep, …). PSA group went through a tough period in 2011-2013 but returned to profitability after the appointment of CEO Carlos Tavarez, who previously was a senior executive at Renault, and following a series of cost-cutting. Since 2014, PSA group has been a well-managed group, focused on generating profit and free cash flows through disciplined cost controlling while steadily growing market share. To give you an idea, operating margins were around 4% in 2014 versus 14.4% today (source: First Half 2023 results ). In 2017 PSA group received a golden opportunity to acquire Opel-Vauxhall, GM's European division. PSA group has acquired it for a steal price because GM wanted to get rid of it desperately after stacking up losses for 20 years and additionally no one else wanted to buy it. In 2018 PSA group and Carlos Tavarez realized one of the most eye-boggling turn-arounds of the century. Less than half a year later PSA group turned a negative recurring operating margin of -2.5% in 2017 into a margin of 5% in H1 2018. My assumption back then was that operating margins of 10% were feasible in 2023, which is now more or less the case (H1 operating margin 10.7% in Europe, Opel-Vauxhall not reported separately).
In the same period, Fiat-Chrysler was continuously struggling with profitability, while realizing very low operating profit margins (ranging from 3 - 5 %). This resulted from strong headwinds from a stringent European regulation framework on CO2 and NOx emission. Year after year Fiat Chrysler was also lagging more and more behind on electrification and clean vehicle technology. Both individual companies lacked the scale to make vital investments to win the electrification race. This created the opportunity to combine two smaller car manufacturers into one global group led by Carlos Tavarez. Fiat-Chrysler was much bigger in terms of revenue, while PSA group was more profitable and had more cash on hand. Stellantis retrieves most of its revenues in North America (48%) and Europe (36%).
In terms of profitability North America is even more important generating 56% of operating income.
Economies of Scale
In a world where electrification and technological advancement in the automotive sector are running at a high pace, economies of scale are very important. One of the largest arguments why PSA group had such a depressing valuation was their lack of market share and global presence. Let us take a look at the situation in both key markets: Europe and North America.
In the U.S. Stellantis is #4 in terms of vehicles sold after GM, Toyota and Ford.
In Europe, Stellantis is #2 in terms of passenger cars sold. With a market share of almost 20%, it comes right after Volkswagen.
Shareholders return
So what to expect in the near-term future for Stellantis? Well, in the last few years, Stellantis has been growing its revenue at a steady pace. In H1 2023 the revenue grew by 12%. In 2022 the revenue growth was 20% (CAGR of 14% over 2 years). In terms of profitability, the numbers are even more impressive. In H1 2023 the profit rose by 37% to record numbers. In 2022 the profit grew by 27%. The Dare Forward 2030 program aims at doubling revenue to 300 Bn. € by 2030 (vs. ~150 Bn. € in 2021).
These impressive numbers also translated into a relative outperformance versus other automotive players.
In H2 2023 the growth momentum is expected to be sustained. Q3 numbers were very decent with a 7% revenue growth versus Q3 2022 yet impacted by the UAW strikers that dominated the latest news. According to the last financial update the strikes cost the group approximately $ 3 Bn. in revenues and $ 800 M. in profit.
Stellantis is also paying dividends and is committed to sustainably increasing dividends. At the current stock price of $20.7 the 2023 dividend of 1.34 € per share ($ 1.43) amounts to a dividend yield of around 6.9%. Additionally, it currently has a running share buyback plan of 1.5 Bn. € (around 2% of current Mcap) summing up to a total shareholders return of around 9%. Considering the enormous net cash position of 29.8 Bn. € The company has undoubtedly room to continue increasing shareholders' returns while sustaining high CAPEX levels. I also expect that financial income could potentially increase to a billion €'s during the next 12 months. This would imply that the group receives at least 3.5% interest on its net cash position. The company states that it invests its liquidity mainly in short-term bonds in EUR and USD.
Becoming a leader in Electric Vehicle Market
Stellantis has big ambitions in terms of becoming a leader in the electric vehicle market. The group plans to launch a total of 75 electric models by 2030 as laid out in their Dare Forward 2030 strategic plan .
In order to meet these ambitious targets, Stellantis also strategically invests in the vertical supply chain of automotive battery production. The company ensured itself of the supply of batteries by having a stake in five gigafactories (3 in Europe, 2 in the North America) and additionally made strategic partnerships with b. In addition, Stellantis is investing in the development of solid-state batteries that have a higher storage capacity, are lighter and can be charged faster than current lithium-based batteries. The group also has strategic partnerships in the supply chain of battery-grade lithium hydroxide. In Europe the company is also investing in building a fast-charging network.
In terms of sales Stellantis is making good progress in terms of electrification. The company has set ambitious targets to become a leader in the electric vehicle market, and it is on track to achieve those targets. The company now has 24 BEVs (battery electric vehicle) on the market and this will double by the end of 2024. In Europe Stellantis now is the #3 in terms of BEV sales and #1 in commercial vehicle BEV sales thanks to popular models such as the New Fiat 500 and the Peugeot e-208. Its market share in LEVs (low emission vehicles) amounts to 15.6%. In 2024 the group plans to launch the Citroen E-C3.
Overall, in the BEV market, Stellantis dominates the A segment (39% share), the B and B-SUV segments (62% and 53% share respectively) and the CV (commercial vehicles) segment (46% share).
In the US Stellantis is #1 in terms of PHEV (plugin hybrid electric vehicle) sales. In H1 2023 their PHEV sales doubled to more than 66k units sold thanks to the success of the Jeep Wrangler 4xe.
Stellantis will launch its first two BEVs in H2 2023 (Ram ProMaster & New Fiat 500). In 2024 the group has planned to expand to 8 BEVs including Dodge Charger Daytona, Wagoneer S, Jeep Recon and Ram 1500 Rev.
Leapmotor acquisition
Last week Stellantis announced that it acquired a 20% stake in Leapmotor , a Chinese pure-play EV company, for 1.5 Bn. €. The acquisition is seen as a way for Stellantis to gain a stronger foothold in the Chinese electric vehicle market, which is the largest in the world. Stellantis has struggled and lost market share in the Chinese market in the recent years. The acquisition of Leapmotor will give the company access to Leapmotor's technology and manufacturing capabilities. Stellantis and Leapmotor will also setup a 51/49 Stellantis-led Joint Venture that will hold the exclusive rights to sell Leapmotor's vehicles outside China. Leapmotor will become Stellantis' most affordable electric brand in Europe.
Hidden value in Maserati
One event that would further unlock value is a potential spinoff of Maserati. Maserati is Stellantis' high end luxury sport car brand that has been around for more than 100 years. A spinoff would follow the successful IPO's of Ferrari and Porsche (Volkswagen group). The CEO of Maserati claimed in 2019 that Stellantis would spinoff when Maserati reaches operating margins reach 20% which is a mile from current margins (9.2% in H1 2023). Another author covered an article on the value and estimated that Maserati could be worth as much as 13 Bn. € when it reaches the 20% margin target.
Valuation
I started off my article stating Stellantis is incredibly cheap. On any metric Stellantis is valuated below both European and US based automotive companies. Additionally no other large automotive company has such an excessive cash position compared to its market cap. When comparing EV/EBIT ((TTM)) the average automotive company is trading at a multiple of 12x, while 1.5x for Stellantis. This suggests a fair Enterprise Value of € 310 Bn. equivalent to a share price of $ 122 (490% upside).
The same conclusion can be made when comparing EV/EBITDA. Stellantis is trading at an EV/EBITDA multiple of 1.2x versus an average of 7.5x versus peers.
There are no rational reasons why Stellantis is trading at a discount. Since the merger of Fiat-Chrysler and PSA group the merger company has simply not been re-rated. While individually PSA-group and Fiat-Chrysler lacked scale, Stellantis is truly a frontrunner in the automotive industry. Additionally the merger group has not yet realized all synergies (targeted by end 2024).
Discount on Discount
If you are looking for deep value I recommend you also take a look to Exor NV ( OTCPK:EXXRF ), owned by the Agnelli family and Peugeot SA ( OTCPK:PEUGF ), owned by the Peugeot family. Both holding companies trade at steep discounts to NAV and have considerable upside.
For Peugeot the discount to NAV currently amounts to a staggering 60%. Considering a historical discount to NAV of 40% there is a 50% upside when the discount would normalize. This additional to potential of its major stake in Stellantis. On top Peugeot has an extensive share buyback program of 450 M. € (versus a 2.2 Bn. € market cap) which will further boost NAV per share and fire up stock price.
With some fantasy both families behind Exor (14.4% ownership in Stellantis) and Peugeot (7.2% ownership in Stellantis) might put pressure on Stellantis to downstream a portion of their enormous mountain of cash (through an exceptional dividend or capital reduction). The family-owned holdings could in turn return the favor and use this cash to buy back shares at depressed levels and dramatically increase the NAV per share.
For further details see:
Stellantis Is Still A Conviction Buy