(BFM Bourse) – The research office Bank of America went buying this week on the group born of the merger between Fiat Chrysler and PSA. The bank considers in particular that the manufacturer is cut out to withstand the difficult electrical transition which risks penalizing the results of car manufacturers.
The party may be nearing the end for automakers. Thanks to strong demand but also to difficulties on the supply side, with the shortage of semiconductors, the large companies in the sector have been able to increase their margins over the past two years. They took advantage of a favorable price environment, illustrating the “pricing power” of these companies.
Stellantis was a perfect illustration, with a current operating margin of 13% in 2022, much closer to premium manufacturers than to “mass market” companies, such as Volkswagen or Renault. A profitability which can also be explained by the company’s efficiency and iron discipline on its costs.
But a normalization of results is on the horizon, and the price environment is likely to be less favorable in the second part of 2023.
More broadly, automakers find themselves having to deal with multiple fires, which Bank of America calls “the perfect storm.” Automotive groups must contain the costs of electrifying their ranges, ensure their supply of electric batteries, develop an on-board software strategy and comply with the obligations of the European Union’s “Fit for 55” plan, which aims to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990, and which in principle prohibits the sale of new non-electric cars and vans in 2035.
Added to this is intense competition in electrics from Chinese manufacturers in China, which is looming fiercely in Europe. BYD plans, for example, to sell no less than 800,000 electric vehicles by 2030 on the Old Continent. Not to mention Tesla, which does not hesitate to cut its prices to take care of its volumes.
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The American IRA as support
Bank of America nevertheless believes that Stellantis has the assets to weather this “storm” and judged on Wednesday that the market was expressing exaggerated fears on this point, insofar as its valuation multiples have already depreciated by 40% compared to their levels of the period 2016-2019 (the bank calculating an average on the basis of the valuations at the time of PSA and Fiat Chrysler which merged at the beginning of 2021 to give birth to Stellantis). As a result, on Wednesday it raised its buy recommendation on the stock (against “neutral” previously) and adjusted its target price upwards to 20 euros against 19 euros previously.
The bank lists five advantages that Stellantis has in this not very obvious context. First, North America remains the company’s main earnings driver, as this region accounts for more than 55% of operating income, according to Bank of America.
However, the electricity transition in the United States is supported by the IRA (“inflation reduction act”), a package of American measures that protect local industry while financing and/or supporting the energy transition. In the automobile sector, a tax credit of up to $7,500 is granted to consumers for the purchase of new electric vehicles. This under certain conditions of local supplies in terms of battery components and materials for the vehicle in question, which must come in part from the “Mexico-United States-Canada” region.
A certain percentage is thus required and then gradually increased over time, between 2023 and 2029. For Bank of America, this measure “substantially de-risks” the transition to electric vehicles in North America.
Second point: the synergies generated by the merger between Fiat Chrysler and PSA, which is the very essence of the birth of Stellantis. Last year, the automaker achieved 7.1 billion euros in synergies in terms of net cash and therefore cash, two years ahead of the target of 5 billion euros.
But Bank of America stresses that this amount has not yet fully translated (only around 50% according to the consultancy) in terms of the income statement. Between 1 billion and 1.5 billion euros in annual synergies should thus, according to its forecasts, boost its results over the period 2023-2026.
“We wouldn’t be surprised if more were made”, further warns the bank, which points out that the bulk of the convergences on the platforms (the low structure of a vehicle, in particular its chassis, and which is designed on industrial tools to produce common bases for different models) will only arrive this year, with the Jeep Avenger and the Fiat 600 produced on the eCMP2 platform, which is based on the know-how inherited from PSA. This will obviously save money.
China from weakness to strength
Third, Stellantis has the advantage of having a small presence in China, with less than 3% of its revenues coming from the world’s second largest economy, which makes it less sensitive than many of its competitors to this market where the battle turns out. arduous in the electric.
Last year the group reduced its industrial footprint in the country, with an “asset light” strategy, also ending its joint venture with the local manufacturer Changsha and the local production of Jeep. China had already long been the great Achilles’ heel of PSA and Fiat Chrysler, with volumes almost insignificant on the scale of these manufacturers.
This weakness could therefore turn into a strength at a time when Chinese competition has become very powerful and the market is renationalising at breakneck speed. of Canada to raise its advice to “outperform” on the stock. “Stellantis is not really present in China, where competition from national manufacturers seems to be intensifying. GM is particularly present there”, wrote the Canadian bank at the time.
Fourth advantage: Stellantis’ strategy in the electric vehicle, whether in terms of platforms or batteries, which allows “maximum flexibility”, appreciates Bank of America.
The establishment points out, for example, that the next generation of the group’s platforms have been designed to be optimized for electric vehicles (BEV) and also accommodate cars with internal combustion engines (ICE), mainly mild hybrids.
“This strategic decision was made to allow flexibility in demand for electric vehicles and to offer more affordable options (on cars with internal combustion engines) until BEV/ICE parity is reached,” she continues. “If Europe fails to put in place an equivalent to the IRA or if the transition to electric vehicles slows down for other reasons, this decision could prove to be wise,” she says.
Last but not least: “the group’s management is attentive to these risks (linked to the electrical transition, editor’s note) and is clearly focusing on the cost reductions which could prove to be decisive”, notes the American bank.
Besides Bank of America and Royal Bank of Canada, Stifel also has a positive view on the stock. The bank explained in May that the action remains a safe bet with “superior quality of execution” which will eventually have to be reflected in its valuation multiples. More broadly according to the consensus compiled by investing.com, of the 22 analysts following the stock, 19 are buying or equivalent, and 3 at “neutral”.
Stellantis will publish its half-year results on July 26. Bank of America expects revenues of 93.2 billion euros, up nearly 6% year on year, and a current operating margin of 13.7%, above the consensus forecast.
Julien Marion – ©2023 BFM Bourse
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