To The Moon

$Stellantis NV(STLA)$ $Tesla Motors(TSLA)$ $BYD COMPANY(01211)$

Stellantis stock is cheap now as car sales are down. However, we are not even close to a recession and that is still then a risk. I can't predict those things do it is not really for me, but it is interesting to see a lot of things related to the automotive industry.

Stellantis stock currently boasts a low P/E ratio and a dividend yield exceeding 10%. However, despite these seemingly attractive metrics, the stock price has plummeted 53% within the past year. This sharp decline raises intriguing questions from a value investing standpoint.

Many investors are wondering about the struggles of automakers like Stellantis, especially since the entire auto industry is facing challenges. To gauge potential opportunities, it’s crucial to understand where we are in the economic cycle and assess the associated risks and rewards.

Earning Overview

Upon examining Stellantis's financials, everything initially appeared solid: high dividends, robust profits, and healthy free cash flows. But recent data tells a different story.

The company now projects industrial free cash flow range between -$5 billion and -$10 billion to swing from positive expectations to a negative. In Q3 2024, net revenues fell by 27% compared to the previous quarter — a substantial decline that inevitably impacts profits.

Fundamental Analysis

Revenue declined -27% in single quarter is huge . Stellantis has introduced many new vehicle models, aiming to capture market share. However, if the market itself is shrinking, this strategy becomes costly. The automotive industry is inherently cyclical, oscillating between "good times" and "bad times." A comparison between the company's 2023 results and the current Q3 presentation highlights this cycle vividly. Record performances in 2023 have given way to temporary challenges in 2024.

Previously, Stellantis enjoyed net income between $15 billion and $17 billion. Now, forecasts suggest losses of up to $10 billion. This volatility explains why automakers often appear undervalued during profitable periods — because downturns can rapidly erode those gains. The company has been investing heavily in new electric vehicles, which seemed promising during the EV boom. But with slowing market growth and increased competition, those investments are now weighing on performance.

EPS

The balance sheet shows some resilience, with net positive financials, though cash reserves may dwindle if losses persist. Stellantis's assets, including significant intangible assets, support a market cap around $40 billion. However, provisions for warranties and potential liabilities could further strain finances if market conditions don’t improve.

Guidance

The key risk is whether these challenges are truly temporary. If the industry downturn extends into 2025 and beyond, Stellantis could face additional declines. The stock may look cheap now, with a P/E ratio of 2-3 and a high dividend yield, but these metrics may deteriorate if conditions worsen.

Automotive Cyclicality: The auto industry is inherently cyclical, experiencing alternating periods of boom and bust. Stellantis is currently in a downturn phase, reflected in declining revenues and negative free cash flows.

Timing the Cycle: Mid-Cycle Positioning: Current conditions suggest we might be in a mid-cycle phase — not at the peak of risk but not at a clear bottom either.Wait for Recession or Clear Recovery: If a recession occurs, auto stocks typically bottom out, offering low-risk, high-reward opportunities. Alternatively, signs of a rebound (improving cash flows, stabilizing revenues) could indicate an entry point.

Free Cash Flow

2022: Positive FCF of €10.8 billion reflected solid operational performance. 2023: Stellantis achieved strong free cash flow, driven by high profitability, cost controls, and favorable market conditions. 2024: Free Cash Flow Projections -€10 billion (negative).

Technical Analysis

Stellantis’s stock price has experienced a ~40-50% decline from its highs within the past year, reflecting concerns over the auto industry’s cyclical downturn and temporary challenges in revenues and free cash flow. Current Price: Approximately $12-$18 USD. 52-Week Low -High: Around $16-30 USD.

Volume Analysis Decreasing Volume: Recent trading has seen lower volume, suggesting a lack of conviction from both buyers and sellers. Watch for Volume Spikes: A significant increase in volume combined with a price move above resistance could confirm a breakout.

Risks and Challenges

Dividend Cuts: High dividend payouts are unsustainable if free cash flow remains negative. Stellantis currently offers a 10% dividend yield, but sustaining this payout is difficult with negative FCF. Dividend cuts may be necessary if cash flow doesn’t recover.

Macroeconomic Conditions: Factors like interest rates, inflation, and consumer spending will impact demand for vehicles. A global recession or higher interest rates could further depress demand. While Stellantis has a relatively strong balance sheet, prolonged negative FCF could erode liquidity and increase reliance on debt.

Cyclical Downturn: If the global automotive market continues to shrink or faces a prolonged downturn, Stellantis's financials may worsen. A prolonged industry slump could exacerbate losses.

EV Transition: Heavy investments in electric vehicles may strain cash flows if demand doesn't meet expectations. High investment costs and slower-than-expected EV adoption.

Short-Term Challenges (2024-2025):

Continued Market Weakness: If the global automotive market remains sluggish, FCF could stay negative. Cost Management Initiatives: Stellantis may need to reduce costs, delay investments, or improve inventory management to stabilize FCF.

Long-Term Recovery Drivers:

EV Strategy Execution: Successful rollout of new electric models could boost revenues and improve cash flow. Cyclical Recovery: As the auto industry rebounds, Stellantis's FCF could return to positive territory. Efficiency Gains: Continued focus on cost efficiencies and strategic investments may support future FCF growth.

Valuation

Compare with Stellantis Peers Valuation Metrics: I compare P/E ratios, P/B ratios, and dividend yields with competitors like Ford, GM, and Volkswagen. Stellantis currently trades at a lower valuation, which might indicate an opportunity if fundamentals improve. Market Position: Consider Stellantis's market share in key regions (Europe, North America, China) and its competitive position in electric vehicles (EVs).

• P/E Ratio: Stellantis currently has a very low Price-to-Earnings (P/E) ratio, ranging between 2-3. This suggests the market is pricing in significant risk or anticipating lower future earnings.

• Dividend Yield: The dividend yield is over 10%, reflecting generous payouts, but there is a risk of cuts if free cash flows remain negative.

• Price-to-Book (P/B) Ratio: Adjusted for intangible assets, the P/B ratio is around 1. This indicates the stock is trading close to its tangible book value.

• Industrial Free Cash Flow: Recent projections show a swing to negative free cash flow, ranging from -€5 billion to -€10 billion. This is a significant shift from 2023's positive cash flow of €13 billion.

Market sentiment

• Revenue Decline: In Q3 2024, net revenues dropped 27% compared to the previous quarter. Such a sharp decline impacts profitability and cash flow.

• Earnings Volatility: Net income has historically ranged from €15-€17 billion but is now projected to potentially dip to a €10 billion loss.

• Debt Position: Stellantis maintains a relatively manageable debt load compared to its cash position, but ongoing losses could erode this buffer within 1-2 years.

Conclusion

Ultimately, while the broader economy remains robust — the U.S. is performing well and Europe is surprisingly resilient — automakers are grappling with overcapacity and shrinking demand. We might currently be in a mid-cycle phase, presenting moderate risks and rewards. If a recession hits, it could unlock a true low-risk, high-reward opportunity. Until then, volatility is likely, and investors should brace for the ups and downs typical of cyclical industries.

Stellantis appears undervalued based on traditional metrics like P/E and P/B ratios, reflecting its cyclical challenges. If the company navigates its current headwinds and returns to positive free cash flow, the stock could offer significant upside. However, risks remain high, and investors should be prepared for volatility or potential dividend cuts.

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