1 Car Maker On Sale Now?

One of the world’s long-standing auto majors, Stellantis (NYSE:STLA) is the parent company of vehicle brands that include Chrysler, Jeep and Dodge, and it’s trading at under four times earnings, which at first glance seems like a steal. 

It’s either a real bargain or a value trap, so which is it?

EV Growth Is On Fire at Stellantis

Unlike most US companies, Stellantis reports earnings twice a year, and in its first half report, released in July, management detailed net revenues of €98.4 billion and a net profit of €10.9 billion, a climb of 12% and 37% respectively versus the year prior.

Although results for the second half of the year have not come in yet, management did provide a summary of shipments and revenues at the end of Q3, spotlighting a 7% year-over-year increase to €45.1 billion and shipments up 11% to 1.4 million vehicles.

The upbeat report suggested that the second half is likely to be a good one for the company when the final results are tallied.

Investors can point to a 37% increase in sales of battery electric vehicles as being among the most positive developments for the firm. Indeed, EV technology as a whole appears to be a centerpiece of management’s focus after forming a $1.6 billion joint venture with Chinese automaker Leapmotor.

Looking forward, much of Stellantis’ future growth will hinge on the success of its attempt to roll out new electric vehicles. The company plans to increase its line of electric offerings to 37 models over the next two years. With the Leapmotor partnership, Stellantis is likely to make inroads in the highly competitive yet lucrative Chinese EV market.

Don’t expect Tesla-like growth in the EV sector just yet, though, as earnings are forecast to rise by 8.6% over the coming year and set to plateau over the next 3-5 years.

Nonetheless, investment in EV technology should increase the long-term value of Stellantis and by 2030, EVs could account for as much as two-thirds of all new car sales globally. 

Is Stellantis Stock Undervalued?

According to analysts, Stellantis stock has upside potential of around 12.3% to a target price of $26.60 per share.

The majority of analysts are bullish on the car maker’s prospects with 19 of the 25 rating the company a Buy at this time.

On a longer timeline, STLA does appear to fall into the category of value stock by trading at just 3.7 times forward earnings, 2.9x cash flow and 0.4x sales.

Even if earnings growth slows or plateaus, the disconnect now between price and value suggests it’s on sale and offers considerable reward to risk potential.

Further confirmation of this comes from the balance sheet that shows a relatively low debt-to-equity ratio of 0.26, which suggests interest rate drag won’t be much of a burden on the firm.

What Do Investors Need To Know?

The ever-changing nature of regulatory restrictions has had a notable effect on Stellantis, not least stricter emissions controls, that have hurt sales of the popular Jeep line, which has cut production accordingly. California’s tightened controls especially have resulted in a slowdown and other larger vehicles could feel the effects too, in particular SUVs. 

The increased calls for unionization that are being targeted at Tesla too are another chief concern for Stellantis because the labor costs are such a substantial variable on the profit and loss statement. As wages go up and long-term contracts are locked in, liabilities climb and investors pay attention by downgrading profit forecasts. The domino effect can also flow through to higher prices, which in turn affects consumer demand.

On the consumer front, another headwind stems from their own pocketbooks being hurt as inflation and interest rate hikes combine to hurt affordability. While car sales have remained strong thus far, higher rates pose serious threats in 2024.

Is Stellantis A Buy?

Stellantis has a great deal going for it at this time and listing so many attributes could fill pages of a novel but we’ll shorten it as follows.

First off, the company has been consistently reporting earnings per share on the rise yet trades at a low earnings multiple when compared to near-term growth expectations. Analysts forecast profitability this year too, so there should be no major surprises in the works.

From a fundamental perspective, few companies rank with perfect Piotroski Scores of 9 but Stellantis joins the rare ones that do, like Berkshire Hathaway. 

It also pays a very noteworthy 6.3% dividend yield, which appears to be entirely safe given that the payout ratio is just 21%.

If there was a glaring concern for investors now, the technical side of the analysis would be it. Or in other words, the stock appears overbought on the RSI.

With that said, Stellantis is attractive relative to other car makers on many key financial ratios. Ford, for instance, trades at 6.1x forward earnings and carries 2.1x its equity in debt. GM’s forward P/E ratio of 4.8 is below Ford’s but still well above Stellantis’. Compared to these two peers, Stellantis is priced quite attractively.

In 2023, the Board of Directors also executed a €1.5 billion share buyback program, showing their conviction in the future prospects of the firm, though it must be noted that should no longer provide a tailwind next year.

The bottom line is Stellantis appears to be a value stock and institutional buyers clearly agree having snapped up over $977 million of Stellantis stock in Q3. By contrast, they sold just $130 million during the same period. While it could take time for Stellantis to deliver significant returns to its investors, the stock has the hallmarks of being a good buying opportunity for conservative, long-term value investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.