In light of lingering economic challenges, it doesn't come as a complete surprise, but seeing it in writing has nevertheless jolted investors. Shares of carmaker Stellantis(NYSE: STLA) are deep in the red Monday, down 12.9% as of midsession after the company lowered its operating margin and cash flow guidance for the current fiscal year.
The company's announcement echoes similar warnings recently issued by rival European automakers Volkswagen(OTC: VWAP.Y) and Mercedes-Benz(OTC: MBGY.Y).
Stellantis taps the profit brakes
In response to "lower than expected sales performance in the second half of the year across most regions" (and "North American performance issues" in particular), Italy's Stellantis says its operating income margin rates for fiscal 2024 should land between 5.5% and 7%. That's down from previous profit-margin guidance of "double digits."
Cash flow is expected to suffer as well. Stellantis adds that its prior 2024 outlook for "positive" free cash flow has been updated to negative free cash flow of between 5 billion and 10 billion euros.
And it isn't alone. Germany's Volkswagen issued a similar warning on Friday thanks to "a challenging market environment" marked by lingering inflation, still-high interest rates, and perhaps even a looming recession. A week earlier, Mercedes-Benz reported its full-year profit margins should only be on the order of 7.5% to 8.5%, down from previous guidance of 10% to 11%. Like Volkswagen and Stellantis, Mercedes notes weakened demand and heightened competition as the root causes of its lowered expectations; China is a particular sore spot.
And the data confirms automobile makers are indeed on the defensive. Domestic as well as international sales of new vehicles have been weakening since the middle of last year.
Not now, if ever
Although the sheer scope of it is jarring, to forward-thinking investors, today's plunge from Stellantis stock to a new 52-week low also makes for a tempting entry point.
Don't take the bait, though.
While the carmaker's brands, like Dodge, Jeep, Fiat, and Chrysler, are certainly still among the industry's most marketable, the industry itself is facing bigger challenges than it can simply shrug off. Even in a stronger economic environment, the automobile business may no longer be a growth business but merely a static one as alternatives to outright ownership of a vehicle -- like ride-hailing -- become increasingly accessible. At the very least, you'll want to wait until companies like Stellantis start reporting real revenue and profit growth before stepping in.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Volkswagen. The Motley Fool recommends Stellantis and Volkswagen Ag. The Motley Fool has a disclosure policy.
