On Thursday, Wolfe Research initiated coverage on Stellantis NV (NYSE:STLA), the multinational automotive manufacturer, with an Outperform rating. The firm highlighted Stellantis's impressive profitability, noting that its EBIT margins for 2023 are projected to be approximately 13%, or about 12% on a US GAAP basis. This performance places Stellantis ahead of its peers like GM, Ford (NYSE:F), and Volkswagen (ETR:VOWG_p), which have margins that are 500-600 basis points lower.
Despite Stellantis's profitability, its current valuation suggests skepticism about the sustainability of its earnings. The company trades at just 3.5 times earnings on a next twelve months (NTM) basis, or roughly 4 times adjusted for US GAAP, with a free cash flow (FCF) yield of about 20%. This valuation is even below those of its peers, which Wolfe Research finds remarkably low.
Wolfe Research acknowledges the concerns about potential headwinds facing the auto industry, such as price declines, competition from Chinese manufacturers, rising costs, foreign exchange fluctuations, and uncertainties related to the electric vehicle (EV) transition.
"We share many of these concerns. Nonetheless, our work suggests that investors underestimate the positives that STLA is bringing to bear, and that STLA may surprise the Street w/r/t the sustainability of their earnings and FCF," said Wofe Research.
The firm estimates that Stellantis had a significant cash reserve of €53 billion at the end of 2023, which is €10 billion above the company's conservative target. With an expected additional €12 billion in FCF for 2024, of which roughly €4 billion will likely go to dividends, Stellantis is positioned to deploy €18 billion towards value-creating opportunities in the next 12-18 months. Wolfe Research suggests that a buyback of 25%-30% is within the realm of possibility.
In addition to buybacks, Wolfe Research points out that Stellantis could engage in mergers and acquisitions (M&A) that could be even more accretive to its value. With these considerations in mind, Wolfe Research has set a price target for Stellantis at €30, which is based on 5 times their 2025 earnings per share (EPS) estimate of €6, or 4 times the pro forma ~€7 EPS when considering the deployment of all excess cash.
InvestingPro Insights
Stellantis NV (NYSE:STLA) has been turning heads with its robust financial performance, and recent data from InvestingPro further underscores the company's strength. With a Market Cap of $68.72 billion and a standout P/E Ratio of just 3.29, Stellantis shows exceptional value, particularly when considering its adjusted P/E Ratio over the last twelve months as of Q2 2023, which sits at an even lower 3.04. This aligns with Wolfe Research's observation of Stellantis's low valuation, despite its strong profitability.
From a growth perspective, Stellantis's Revenue Growth over the last twelve months as of Q2 2023 was 15.26%, indicating a solid top-line expansion. This is complemented by a substantial Dividend Yield of 6.59%, showcasing the company's commitment to returning value to shareholders. These metrics are a testament to Stellantis's financial health and its ability to navigate the competitive automotive industry effectively.
InvestingPro Tips for Stellantis provide additional context. The company holds more cash than debt, which could be a reassuring sign for investors concerned about financial stability. Moreover, Stellantis is trading at a low P/E ratio relative to near-term earnings growth, suggesting that its stock may be undervalued. For those interested in a deeper dive, there are over 12 additional InvestingPro Tips available, which can be accessed with a subscription to InvestingPro.
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