1 'Big 3' Auto Stock That Looks Set to Outperform

The automotive industry is undergoing a massive transformation, with hybrid and electric vehicles (EVs) leading the charge. In the first quarter of 2024, global EV sales rose by 21% compared to last year, led by growing consumer demand, government incentives, and more affordable models from major automakers. In this context, Stellantis (STLA), the multinational automotive giant formed by the merger of Fiat Chrysler Automobiles and Groupe PSA, has emerged as a frontrunner, positioning itself strategically to capitalize on the industry's transition.

The former Detroit “Big Three” titan's unique positioning was on full display at its 2024 Investor Day held on June 13, where CEO Carlos Tavares outlined nine key strategic advantages that are enabling the company to unlock value and address industry challenges head-on. 

Now, Stellantis has been tipped by Bank of America (BofA) to outperform its Big 3 rivals, General Motors (GM) and Ford (F), as well as hybrid heavyweight Toyota (TM). In particular, the analysts expect Stellantis to benefit from its diverse portfolio of brands and its commitment to electrification. 

With a consensus “moderate buy” rating on Wall Street and a projected 47% upside to the mean price target, Stellantis is widely seen as a compelling investment opportunity in the rapidly evolving automotive landscape. Can STLA live up to analysts' expectations and help lead the auto industry through its electrification transition? Let's find out.

A Closer Look at Stellantis' Financial Performance

Stellantis N.V. (STLA) is a powerhouse in the auto industry, with an impressive lineup of 14 iconic car brands like Jeep, Ram, Peugeot, and Maserati under its belt. This gives them nearly unmatched flexibility to adapt to different markets and consumer tastes around the world.

One of Stellantis' strengths is that they aren't too dependent on the Chinese market, which has become a risk for some automakers, due to simmering trade tensions and increased competition from local players. Instead, Stellantis is focusing on well-established markets like North America, Europe, and emerging regions like South America, the Middle East, and Africa.

STLA stock has experienced significant volatility in recent months. After peaking at around $29.51 in March, the stock has pulled back 30%. STLA is now off 12% on a YTD basis, but is up more than 21% over the last 52 weeks.

Stellantis is trading at a very low price/earnings ratio of around 3.69, compared to other automakers, indicating that the stock is undervalued. And their 8% dividend yield is pretty juicy for income investors. The balance sheet is also rock solid, with a huge cash position of over €47 billion.

Management is getting smarter about how they use that cash, aiming to bring liquidity down to 25-30% of revenue over time. This could mean more share buybacks or strategic investments in the future. In fact, Stellantis announced a €3 billion share buyback program in February 2024, which is part of their broader plan to return over €7.7 billion to shareholders through dividends and buybacks this year

Despite the recent dip in the stock price, Stellantis has been performing well financially. In their latest earnings report for 2H 2023, they posted an EPS of $2.99 and revenues of $97.8 billion, just shy of expectations. However, they maintained a double-digit adjusted operating income margin, showing their commitment to strong financial performance even in uncertain times.

Stellantis has been proactively managing its inventory and preparing for a wave of new product launches in the second half of 2024, which is expected to drive growth and profitability. Their commercial vehicle segment continues to perform well, achieving market share leadership in regions like the Middle East & Africa and maintaining its top position in Europe and South America. Plus, EV sales have shown impressive growth, with North American PHEV sales up 79% year-over-year

The Fundamentals Behind Stellantis' Success

Stellantis is making some big moves to stay ahead in the competitive automotive game. One major shift is its decision to move some EV production from China to Europe. This strategic move aims to avoid potential EU tariffs, keeping prices competitive and reducing operational costs. By producing in the European market, Stellantis can better align with regional regulations and consumer preferences, potentially boosting its market share in the growing EV sector.

Another important development is Stellantis' recent recall of around 200,000 Dodge SUVs and Ram trucks due to stability control issues. While recalls can initially hurt a company's reputation and stock price, Stellantis' proactive approach to addressing these safety concerns can help maintain long-term customer trust and loyalty. By quickly resolving these issues, the company shows its commitment to quality and safety, which are crucial for sustaining consumer confidence.

Additionally, Stellantis is expanding its electric vehicle charging options in North America by adopting the proposed SAE J3400 connector. Starting with select models in 2025, this initiative will enhance the charging infrastructure for Stellantis' battery-electric vehicles (BEVs). The joint venture to install at least 30,000 high-powered charge points by 2030 underscores Stellantis' dedication to supporting its EV customers and promoting sustainable transportation. This move not only improves the customer experience but also positions Stellantis as a forward-thinking leader in the EV market.

Analysts Weigh in on Stellantis Stock

When it comes to Stellantis stock, analysts are upbeat. While the company isn't expected to deliver EPS growth until fiscal year 2025, the consensus rating on Wall Street is a “moderate buy."

Out of 17 analysts offering recommendations, 10 suggest a “strong buy,” 2 recommend a “moderate buy,” 4 advise “hold," and only 1 suggests a “strong sell.” 

The mean price target is set at $30.13, which implies a substantial upside of approximately 47% from Friday's close.

As the automotive industry continues its rapid transformation, Stellantis finds itself with a leg up on the competition. With a solid model pipeline, strong liquidity, and strategic synergies, the company is well-equipped to outperform its Big 3 rivals, as well as competitors in Japan and Germany, in the years ahead.