Bank of America upgraded Detroit automaker Stellantis (NYSE:STLA) to a Buy rating (From: Neutral) and raised their 12-month price target on the stock to €20.00 from €19.00 (€1 = $1.1079) ahead of the company’s 2Q earnings release.
Bank of America predicts that as the limitations on supply chains become less strict, there is a high probability of returning to normalcy for the automaker. They had experienced a brief period of excessive profits due to a beneficial combination of product mix and pricing in a market with limited supply. Consensus already expects a sharp decline in 2H23 for Stellantis. However, Bank of America believes the trajectory may prove more gradual.
A convergence of factors is creating a difficult environment for EU OEMs as they navigate the complexities of battery procurement, software strategy, compliance with the "Fit for 55" targets, and the increasing competition from Chinese counterparts, both in China and soon, within Europe as well.
Analysts wrote in a note, “While the Inflation Reduction Act (IRA) largely de-risks the transition in the US and adds protection for local production, Europe desperately needs similar legislation. However, with this neither imminent nor definite, the region appears set to become far more challenging mid-term. That said, we see five key reasons why Stellantis should weather the storm successfully: (1) it’s largest profit pool, N. America ( more than 55% of EBIT) benefits from the IRA; (2) merger synergies of c€1-1.5bn pa and possibly more in FY23-26E are offsets; (3) it has low exposure (less than 3%) and hence limited dependency on China vs peers; (4) it’s EV strategy (platform and batteries) allows for maximum flexibility; and (5) management is alert to these risks and has a clear focus on cost reductions which may prove decisive.”
Bank of America expects a strong performance from Stellantis in 1H’23, forecasting adjusted EBIT of €12.8 billion (margin: 13.7%), +9% ahead of consensus. Normalization and a possible UAW strike in the U.S. could create a tougher backdrop and Bank of America expects adjusted EBIT to decline to €10.4B (margin 11.6%). Nevertheless, this positions them 9%/12%/11% ahead of consensus for 1H’23/2H’23/FY23E.
Shares of STLA are up 2.28% in pre-market trading on Wednesday.