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Investing.com -- On Thursday, Fitch Ratings announced a downgrade of Stellantis NV’s (NYSE:STLA) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to ’BBB’ from ’BBB+’. The outlook for the auto manufacturer remains stable despite the downgrade, which was prompted by deteriorating market conditions in North America and rising cost pressures from new tariffs.
The downgrade reflects challenges including tariffs that could impact production volumes and the ability of Stellantis to absorb short-term shocks. Fitch now anticipates the company’s earnings before interest and taxes (EBIT) and free cash flow (FCF) margins to be around 5% and 1%, respectively, for the forthcoming 12 months, which are below previous expectations.
Stellantis faced a reduction in profitability in 2024 due to inventory normalization in Europe and the U.S., with the Fitch-adjusted EBIT margin falling to 4.2%. The company is launching new products which may support a rebound in pricing in 2025, but this is contingent on market conditions.
Fitch anticipates that the uncertainty created by U.S. tariff announcements could negatively impact production and sales in the U.S. market, prompting manufacturers to restructure and optimize costs. Raw material price increases and supplier cost pressures are expected to further challenge profitability, with EBIT margins projected to remain between 5%-7% until 2027.
Stellantis, which manufactures around 40% of its U.S. sales outside the country, is particularly exposed to the impact of U.S. tariffs. The company may shift production to the U.S. to mitigate this, but such adjustments would take time and upfront investment, impacting FCF. Despite these pressures, Fitch expects a slight improvement in FCF margins in 2025 due to better working capital management and projects a margin of around 1.5% by 2026.
Stellantis’ financial structure is considered strong, with a net cash position and expected neutral to negative net leverage as FCF improves. No major changes in dividend distribution are forecast until cash generation stabilizes. However, the company’s leverage headroom is diminished, which could be further reduced if a more shareholder-friendly policy is adopted.
Competition in Europe is intensifying, with Stellantis’ market share dropping to 16% at the end of 2024 from 19% at the end of 2023. New model launches may help, but the market remains challenging for mass market manufacturers. The company is also in the process of selecting a new CEO, which leaves its long-term strategy uncertain in a turbulent environment.
Stellantis’ business and financial profiles are still in line with the ’BBB’ rating category, with scale, diversification, and presence in multiple markets. Its luxury brand strategy and financial profile compare favorably with its peers, and its EBIT and FCF margins are expected to improve in the medium term.
Fitch’s key assumptions include a decline in industrial revenues due to pricing pressures, an EBIT margin of 5% in 2025, and average capex of 6% of sales through 2028. A common dividend policy of 25% of net income is assumed, with no share buybacks from 2025.
The rating sensitivities indicate that a consistent EBIT margin below 4%, a FCF margin under 1%, or a prolonged net debt position could lead to further negative rating action. Conversely, an EBIT margin above 6%, a FCF margin over 2%, and a sustained net cash position could lead to a positive rating action.
In other news, Stellantis has paused production at Canada’s Windsor Assembly Plant and Mexico’s Toluca Assemply Plant. The Windsor plant will be closed for two weeks at least, impacting around 4,500 workers. Toluca workers will continue to report and get paid, but vehicle production will be down for the rest of April.
The tariffs have also affected workers at five U.S. Stellantis plants, as 900 workers have been temporarily laid off. One of these plants will be pausing production.
Investors have reacted negatively to the tariff news, as shares of Stellantis have dropped 9.5%. Shares of other U.S. automakers have also dropped, including Ford Motor Company (NYSE:F) (down 5.4%) and General Motors Company (NYSE:GM) (down 4.4%).