(BFM Bourse) – This week, the research firm Bank of America bought the group born from the merger between Fiat Chrysler and PSA. In particular, the bank assesses that the manufacturer is cut out to withstand the difficult electricity transition, which risks punishing the car manufacturers’ results.
The party may be over for automakers. Thanks to strong demand, but also difficulties on the supply side, with a shortage of semiconductors, the major companies in the sector have been able to increase their margins over the past two years. They took advantage of a favorable pricing 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 that can also be explained by the company’s efficiency and discipline on its costs.
But a normalization of results is on the way, and the price environment is likely to be less favorable in the second half of 2023.
More broadly, automakers are finding they have to deal with more fires, which Bank of America calls “the perfect storm.” Car groups must contain the costs of electrifying their range, secure their supply of electric batteries, develop an on-board software strategy and meet the commitments of the European Union’s “Fit for 55” plan, which aims to reduce greenhouse gas emissions by at least 55% in 2030 compared to 1990, and which in principle prohibits the sale of new non-electric cars and vans in 2035.
In addition, there is intense competition in electricity from Chinese manufacturers in China, which is a serious threat in Europe. BYD, for example, plans to sell no less than 800,000 electric cars by 2030 on the old continent. Not to mention Tesla, which does not hesitate to lower its prices to suit its volumes.
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The American IRA as support
Bank of America nonetheless believes that Stellantis has the assets to weather this “storm” and assessed on Wednesday that the market was expressing excessive fear on this point, as its valuation multiples have already fallen 40% compared to their 2016 levels -2019 (the bank calculates an average based on the valuations at the time of PSA and Fiat Chrysler, which merged in early 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 from 19 euros previously.
The bank lists five advantages that Stellantis has in this not very obvious context. First, North America remains the company’s primary earnings driver, as this region accounts for more than 55% of operating income, according to Bank of America.
However, the electricity transition in the US is supported by the IRA (“inflation reduction act”), a package of US measures that protect the local industry and at the same time finance and/or support the energy transition. In the automotive sector, a tax credit of up to $7,500 is given to consumers for the purchase of new electric vehicles. This is subject to certain conditions for local supplies of battery components and materials for the vehicle in question, which must come in part from the “Mexico-United States-Canada” region.
Thus, a certain percentage is required and then gradually increases over time, between 2023 and 2029. For Bank of America, this measure “significantly de-risks” the transition to electric vehicles in North America.
Second point: the synergies of the merger between Fiat Chrysler and PSA, which are the very essence of the birth of Stellantis. Last year, the carmaker 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 emphasizes that this amount has not yet been fully translated (only about 50%, according to the consultancy) in terms of the income statement. Thus, according to its forecasts, between 1 billion and 1.5 billion euros in annual synergies should increase its results in the period 2023-2026.
“We would not be surprised if more were made”, further warns the bank, which points out that the majority of the convergences on the platforms (the low structure of a vehicle, especially its chassis, and which is designed on industrial tools to produce common bases for different models) will arrive only this year, with the Jeep Avenger and 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, where less than 3% of its revenue comes from the world’s second largest economy, making it less sensitive than many of its competitors to this market where the struggle is evident . in the electrical field.
Last year, the group reduced its industrial footprint in the country with an “asset light” strategy, which also ended its joint venture with local manufacturer Changsha and the local production of Jeep. China had already long been the major Achilles heel of PSA and Fiat Chrysler, with volumes almost negligible on the scale of these manufacturers.
This weakness can therefore turn into a strength at a time when Chinese competition has become very strong and the market is renationalising at a furious rate. of Canada to raise its “outperform” advice on the stock. “Stellantis is not really present in China, where competition from domestic manufacturers appears to be intensifying. GM is particularly present there,” the Canadian bank wrote at the time.
Fourth advantage: Stellantis’ strategy in the electric vehicle, whether it is about platforms or batteries, which allows “maximum flexibility”, Bank of America appreciates.
The establishment points out, for example, that the next generation of the group’s platforms are designed to be optimized for electric vehicles (BEV) and also accommodate internal combustion engine (ICE) cars, mainly mild hybrids.
“This strategic decision was made to allow flexibility in demand for electric vehicles and to offer more affordable options (on internal combustion engine cars) until BEV/ICE parity is reached,” she continues. “If Europe fails to introduce an equivalent to the IRA, or if the transition to electric vehicles slows down for other reasons, this decision may turn out to be wise,” she says.
Last, but not least: “The group’s management is aware of these risks (linked to the electric transition, editor’s note) and has a clear focus on the cost reductions that may prove to be decisive”, notes the American bank.
In addition to 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 should ultimately 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 buy or equal, and 3 are “neutral.”
Stellantis publishes its half-year accounts on 26 July. Bank of America expects revenue of 93.2 billion euros, up nearly 6% year-over-year, and a current operating margin of 13.7%, above the consensus forecast.
Julien Marion – ©2023 BFM Bourse
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