STELLANTIS Getting Interesting!

Key Concepts

Automotive Cycle: The inherent cyclical nature of the automotive industry, characterized by periods of boom and bust, significantly impacting company performance and stock prices.
Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
Operating Adjusted Income: A measure of a company's profitability before certain non-recurring or non-cash items.
Shipments: The number of vehicles a manufacturer delivers to dealers or customers.
Net Revenues: The total income generated from sales after deducting returns, allowances, and discounts.
Adjusted Earnings: Earnings adjusted for specific items that are not part of a company's normal operations.
Inventory: Goods that a company has on hand and is available for sale.
Impairments: A reduction in the carrying value of an asset on a company's balance sheet when its market value or utility has declined.
Dividend: A distribution of a portion of a company's earnings to its shareholders.
Net Cash Position: The difference between a company's cash and cash equivalents and its short-term debt.
Electric Vehicle (EV) Transition: The industry-wide shift towards producing and selling electric vehicles.
Gigafactories: Large-scale manufacturing facilities, often associated with battery production for EVs.
Solid-State Technology: An advanced type of battery technology that uses solid electrolytes.
Capitulation: A market phenomenon where investors, after a prolonged period of losses, sell their assets in large numbers, often at depressed prices.
Interest Rates: The cost of borrowing money, which significantly impacts consumer demand for large purchases like cars.
Delinquency Rates: The percentage of borrowers who are behind on their loan payments, indicating financial stress.

Stellantis: A Cyclical Play with Significant Risks and Potential Rewards

This analysis focuses on Stellantis, an automotive company currently presenting an interesting investment opportunity due to its declining stock price and underlying potential. The core argument revolves around the extreme cyclicality of the automotive market and how Stellantis is currently positioned within this cycle.

The Automotive Cycle and Stellantis's Current Position

The automotive industry is inherently cyclical, and Stellantis is experiencing a significant downturn. This is evidenced by:

Negative Free Cash Flow: Stellantis's industrial free cash flow has turned negative, standing at -3 billion USD, a stark contrast to its previous positive 8 billion USD.
Losses in Operating Adjusted Income: The company is currently reporting no profits, indicating a challenging period. This is occurring even though the broader economy is not in a severe recession, suggesting the automotive cycle is a primary driver.
Declining Shipments and Revenues: Shipments are down 7%, net revenues are impacted by lower prices and foreign exchange rates, and adjusted earnings have plummeted by 92%. These figures highlight the severe impact of the current downcycle.

Past Performance and Investor Sentiment

The speaker reflects on a previous assessment of Stellantis made three years ago, where they were bearish on the stock. Contrary to their prediction, the stock has since risen by 66%. This highlights the difficulty in timing cyclical investments and the potential for significant gains when sentiment is negative. Currently, with the stock's recent decline, there is a "radio silence" from investors, suggesting a potential contrarian opportunity.

Financial Health and Cash Burn

Despite the current downturn, Stellantis maintains a strong cash position of 9 billion USD net. However, this cash has been significantly depleted, with a 40% decline and 7 billion USD burned through in the last six months. This rapid cash burn is attributed to ongoing investments and dividend payouts, underscoring the vulnerability of the company's cash reserves during a prolonged downturn.

Strategic Shifts and Past Investments

Stellantis has undergone significant strategic shifts, particularly concerning its electric vehicle (EV) ambitions. Previously, the company committed 30 billion USD to EV development, including powertrain gigafactories and solid-state technology. However, these investments have not yielded expected results, leading to cash burn and potential future impairments if these initiatives do not succeed. The company is now under new leadership with a new CEO and a proposed 13 billion USD investment plan, signaling a renewed attempt at a turnaround.

Key Risks and Potential Upside

The primary risk for Stellantis is the automotive cycle itself. The management and specific strategies are considered less relevant than the broader market trends.

Inventory Management: A significant portion of the company's cash (8 billion USD) is tied up in inventory. If this inventory cannot be sold, it could lead to substantial impairments.
Global Demand: Global car demand growth is projected to be very slow at 1%.
Competition: Increased car exports from China, offering potentially cheaper and better-made alternatives, pose a significant competitive threat.
Interest Rates: High interest rates (around 7% in the US) are a headwind for car sales. A drop to 4% could provide some traction, potentially leading to a 50% stock price increase.
Recessionary Impact: A severe recession could lead to a significant drop in car sales (potentially over 15%), resulting in severe losses for automotive companies.

Despite these risks, there is potential for significant upside:

Cyclical Rebound: If the automotive cycle turns positive, Stellantis could see a rapid stock price increase, potentially exceeding 50%.
Dividend and Cash: The company has a strong dividend and a substantial cash position, which should allow it to survive a downturn.
Turnaround Potential: The new leadership and investment plans offer a chance for a successful turnaround.

Investment Strategy and Conclusion

The speaker suggests a contrarian approach to investing in Stellantis:

Buy at Capitulation: The ideal scenario is to invest when investor sentiment is at its lowest, and the market has "capitulated" on automotive stocks.
Phased Entry: Consider buying now and adding to the position if the stock price declines further (e.g., by 30-40%), then selling and repurchasing as the cycle recovers.
Watchlist Candidate: Stellantis is a strong candidate for a watchlist, with the potential for significant returns (likely above 10%) with any improvements.

The speaker categorizes Stellantis as a "high risk" investment currently, but acknowledges that if the stock price continues to fall and other factors remain constant, it could move towards a "low risk and higher reward" profile. The company is described as a "cigar butt" – a cheap stock that may have a few more puffs left in it. The ultimate decision to invest hinges on the investor's risk tolerance and the timing of the automotive cycle.