BofA backs Stellantis after tough first half: Is it a Buy?


Bank of America recently reaffirmed its bullish stance on Stellantis N.V. (NYSE: STLA), despite the automaker’s rocky start to 2024. The first half of the year was marred by several setbacks, including go-to-market mistakes, foreign exchange challenges, and delays in new launches.

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These hurdles contributed to a 16.3% drop in Stellantis’ stock year-to-date.

However, BofA analyst Michael Jacks believes these issues are temporary and highlights Stellantis’ solid strategic decisions, robust model pipeline, strong liquidity, and significant merger synergies as key factors that could drive earnings improvement in the near future.

The EV gambit

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Stellantis’ recent efforts in the hybrid vehicle market are noteworthy. The company announced plans to offer 30 hybrid models in Europe this year, with six more expected by 2026. This comes after a 41% increase in EU30 hybrid sales year-to-date compared to the same period last year.

Stellantis is investing over €50 billion in electrification to achieve its Dare Forward 2030 targets, aiming for a 100% battery electric vehicle sales mix in Europe and a 50% mix in the United States by 2030. This ambitious plan underscores Stellantis’ commitment to leading the charge in the EV transition.

The challenges

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Despite these advancements, Stellantis faced significant challenges in the second quarter. U.S. vehicle sales plummeted by 21%, with notable declines across its Jeep, Ram, Dodge, and Chrysler brands.

However, there were bright spots, such as the Jeep Wagoneer, which saw a 107% year-over-year increase in June. This mixed performance reflects the ongoing volatility in the automotive market, driven by fluctuating consumer demand and competitive pressures.

Adding to its challenges, Stellantis recently issued a safety recall for nearly 1.2 million vehicles in the U.S. and Canada due to a software glitch that could disable rearview cameras. While the company has begun providing software updates to address the issue, such recalls can tarnish a brand’s reputation and strain customer trust.

In a strategic move, Stellantis is shifting some of its EV production out of China ahead of new EU tariffs on Chinese-made EVs. This decision, driven by anticipated tariffs as high as 38%, is expected to mitigate the financial impact of the trade tensions between China and the EU.

Stellantis’ minimal exposure to China is seen as a strategic advantage, positioning it favorably compared to peers more deeply entrenched in the Chinese market.

Earnings, outlook, valuation and analyst views

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Stellantis’ recent earnings have been a mixed bag. Q1 results showed a 12% drop in revenue and a 10% decline in shipments. However, the company’s robust liquidity position, with over €47 billion in cash, provides a significant buffer against economic uncertainties.

Stellantis’ commitment to returning excess cash to shareholders through dividends and buybacks further underscores its financial health.

Stellantis also reaffirmed its 2024 financial guidance recently, targeting a double-digit adjusted operating income margin and positive industrial free cash flows.

The company plans to return over €7.7 billion to shareholders through dividends and buybacks in 2024, reflecting its strong capital return strategy.

From a fundamental perspective, Stellantis’ extensive brand portfolio, including names like Maserati, Alfa Romeo, Jeep, and Dodge, is a significant asset.

The company’s ability to generate substantial operating income and free cash flow, coupled with a large cash position, suggests it is undervalued. Stellantis’ forward P/E ratio of 3.6 and a combined annual yield through dividends and buyback of 12% to 16% make it an attractive investment opportunity.

Wall Street analysts have varied views on Stellantis. While some see the current valuation as an opportunity, others remain cautious due to the automotive industry’s inherent risks, such as capital intensity and the ongoing shift towards electrification.

However, analysts generally agree that Stellantis’ strong fundamentals and strategic positioning could drive future growth.

Stellantis has faced significant challenges in the first half of 2024, but its strategic initiatives and strong fundamentals provide a solid foundation for recovery. With a slew of new product launches and a focus on cost-cutting, the company is well-positioned to navigate the competitive automotive landscape.

To better understand how these factors might influence Stellantis’ stock price movement, let’s delve into the charts to assess the stock’s future price trajectory.

$17.4 Support must hold

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Though Stellantis’ stock has lost more than 30% of its value since peaking above $29.5 in March this year, it continues to remain in a long-term uptrend that started in mid-2020.

STLA chart by TradingView

The medium-term and short-term indicators have turned bearish, but long-term weekly indicators are yet to turn negative. Considering that investors who are bullish on the stock have a low-risk opportunity here to go long.

Bullish investors can buy the stock at the current levels under $19.5 with a stop loss below medium-term support at $17.4. If the stock again finds support at these levels and bullish momentum emerges, we can see the stock retracing back to above $25 in the coming months.

Traders who continue to remain bearish on the stock also have a decent entry point here with short-term and medium-term indicators in the red. They can short the stock at current levels with a small stop loss at $21.66. The stock can find support near $17.4 where they can book profits or wait for it to breach that level for higher gains.

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