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On Thursday, Wolfe Research initiated coverage on Stellantis NV (NYSE:STLA) with a Peerperform rating. The firm highlighted that consensus estimates might not fully account for the cyclical challenges Stellantis faces, particularly in the North American (NA) market. These challenges include inventory destocking and pricing headwinds that could impact the company's financial performance.
Wolfe Research anticipates that Stellantis' earnings before interest and taxes (EBIT) for the second half of 2024 will be significantly lower than the market's expectations, projecting over 20% less than consensus. The firm also forecasts a free cash flow (FCF) of approximately €1.5 billion, which is considerably lower than the market's expectation of more than €5 billion.
The research firm expressed concerns that inventory destocking may not be completed by the end of the year, based on sales and inventory data. This could limit volume growth in 2025, along with potential price and mix erosion, as well as cost increases as Stellantis ramps up electric vehicle (EV) production in North America. Consequently, Wolfe Research's EBIT estimate for 2025 is roughly 25% below the consensus.
Despite Stellantis' underperformance in the market year-to-date, with a 28% decline compared to the S&P 500's 17% increase, Wolfe Research believes the market has not fully priced in the potential downside to the company's 2025 figures. This view is partly due to the significant number of European investors who may be less familiar with the North American market conditions.
Wolfe Research sees the possibility of becoming more positive on Stellantis in the future, once inventories are destocked or market expectations are adjusted. The firm acknowledges that Stellantis could be developing significant competitive advantages through its capital-efficient modular platform approach, which might lead to cost savings of €1 billion annually. Additionally, the establishment of capacity and localized supply chains in cost-effective countries could be beneficial. Wolfe Research also anticipates an increase in shareholder returns, modeling €4 billion in buybacks for 2025 compared to €3 billion in 2024.
In other recent news, Stellantis NV has faced a series of developments. The company reported a challenging first half of 2024, with high expenses and operational issues affecting performance. Despite this, CEO Carlos Tavares expressed confidence in the company's resilience and strategic plan, which includes launching 20 new models and a focus on affordable electric vehicles. These developments follow a decrease in car registrations in July, with Stellantis reporting a 5.2% downturn amid heightened competition from Chinese manufacturers.
In response to declining profitability, Tavares is set to visit Detroit to develop a turnaround strategy. This comes after Stellantis reported a larger-than-anticipated fall in revenue and operating profit for the first half of the year, attributed partly to internal operational challenges. Despite these challenges, Nomura/Instinet upgraded Stellantis stock from Neutral to Buy, highlighting management's resolve and the launch of new, cost-competitive products in Europe.
On the other hand, Citi revised its outlook on Stellantis, reducing the price target and lowering the full-year 2024 adjusted operating income margin forecast due to anticipated headwinds. This follows a weaker than expected first-half performance for the year 2024. Citi's report suggests a potential recovery for Stellantis might be delayed until the fiscal year 2025.
InvestingPro Insights
As Wolfe Research casts a cautious eye on Stellantis NV (NYSE:STLA), highlighting potential cyclical challenges and lower-than-expected financial performance, it's important to consider some key metrics and insights. According to InvestingPro data, Stellantis has a robust market capitalization of $47.1 billion and trades at an attractive price-to-earnings (P/E) ratio of just 3.2, suggesting the stock may be undervalued relative to its earnings. Additionally, the company's P/E ratio adjusted for the last twelve months as of Q2 2024 stands at an even lower 2.76.
From a dividend perspective, Stellantis offers a compelling yield of 7.9%, which is quite significant for income-seeking investors. This could be a key factor to consider, especially when Wolfe Research projects an increase in shareholder returns. Moreover, despite recent stock price declines, with a 27.53% drop over the last three months, InvestingPro Tips suggest that Stellantis holds more cash than debt on its balance sheet and has been aggressively buying back shares, indicating confidence from management in the company's value proposition.
Furthermore, with a gross profit margin of 18.14% for the last twelve months as of Q2 2024, Stellantis shows a solid ability to retain earnings from sales, although Wolfe Research raises concerns about weak gross profit margins. For investors interested in further analysis, there are additional InvestingPro Tips available, including insights on sales decline, trading multiples, and profitability predictions, which can be found at InvestingPro's dedicated section for Stellantis.
Ultimately, as Wolfe Research suggests potential for a more positive outlook on Stellantis in the future, the current financial metrics and InvestingPro Tips may provide a broader context for investors considering the company's stock.
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