Stellantis: Investors Can Expect A Strong Profit Margin And Equity Yield In 2024 (2024)

Stellantis (NYSE:STLA) stock is trading higher after the automaker reported strong Q4 and FY 2023 results, while highlighting a commitment to achieve "at least a double-digit adjusted operating income margin in 2024", on a €190+ billion topline expectations. In addition, Stellantis management delighted with the projection to distribute a yield-rich €7.7 billion of cash to shareholders, up about 16% from the €6.6 billion distributed in 2023. Looking at the broader automotive sector as we move into 2024, I argue that sentiment towards OEMs like Stellantis should improve, as interest rates fall and global consumer demand for higher-priced capital goods is projected to strengthen. Moreover, I view fears related to the disruption from electric vehicles as overly exaggerated. The shift towards EVs is expected to be incremental, with a complete transition remaining uncertain. In any case, Stellantis increasingly looks to be in a strong position to meet both existing (ICE) and emerging consumer demands (BEV), ensuring sustained profitability in the forthcoming years.

All this said, I maintain that Stellantis shares have considerable potential for a significant multiple rerating, as the company's core strengths are not fully recognized or valued by the market. Indeed, I highlight that Stellantis' stock is trading at roughly 0.4x FY 2024 sales and under 3x estimated FY 2024 cash flows (roughly 70% discount to the sector median).

For context: Stellantis stock has been performing strongly for the trailing twelve months, with STLA shares up almost 52%, compared to a gain of "only" 22% for the S&P 500 (SP500).

Stellantis Earnings Results Top Estimates

Stellantis reported outstanding FY 2023 results as the company generated €189.5 billion of sales (+6% YoY) on 6.4 million units shipped (+7% YoY). Notably, Stellantis managed to beat consensus expectations by around $3 billion, compared to the projections made by analysts at the beginning of 2023 as per Refinitiv data, despite material production headwinds due to UAW strikes.

Regarding profitability, Stellantis' operating margin for FY 2023 remained comfortably in double-digit territory. In fact, at 12.8% adjusted EBIT margin, the operating profitability margin contracted only by about 60 basis points compared to the enormously profitable year 2022, and profitability was well above the 11.6% adjusted EBIT margin projected by analysts at the beginning of 2023. After accounting for non-operating expenses and taxes, Stellantis net income attributable to shareholders came in at €18.6 billion, or €5.94 per share, a 12% YoY increase compared to 2022, surpassing consensus estimates by €60-65 cents.

While Stellantis operating margins point to cost leadership, it is interesting to point out that the operating income growth in 2023 was mostly supported by pricing power (in the sphere of management control), which contributed €6.7 billion to the YoY bridge, while headwinds were mostly related to FX exposure (not in the sphere of management control).

One of the most compelling attributes of Stellantis for investors is its remarkable record and future prospects for cash distributions. In FY 2023, buoyed by robust commercial and financial performance, Stellantis returned €6.6 billion to its shareholders, which represents an 8% yield on its market capitalization as of February 16th. This return comprised €2.4 billion in share buybacks and €4.2 billion in dividends.

Despite concerns among investors about the sustainability of such generous payouts, Stellantis has forecasted a 16% YoY increase in equity yield for 2024. This would elevate total distributions to €7.7 billion, indicating an 11% yield against the company’s market capitalization as of February 16th, split into €4.7 billion in dividends and €3 billion in share buybacks.

As a notably important side commentary, Stellantis closed FY 2023 with an industrial net cash position of €29.5 billion, well above the industry-norm of a net-debt position.

Supportive Macro Environment Heading Into 2024

As we move into 2024, the company is poised to maintain strong commercial momentum on the backdrop of an strengthening macroeconomic environment, significantly influenced by the anticipated benefits of projected interest rate reductions. Investors should consider that rate cuts are expected to serve as a significant boost to car demand, given the industry's reliance on credit financing for a large portion of automotive purchases. In addition, sectors like automotive are likely to gain from a strong GDP environment. Indicators such as the latest Purchasing Managers' Index (PMI) and economic growth data point towards a robust and improving global economy, especially the U.S. which is Stellantis' largest market.

Leveraging the momentum from 2023, Stellantis management highlighted several additional elements that may foster a conducive environment for revenue growth in 2024. These elements include diminished supply chain and logistical challenges and anticipated demand tailwinds from the company's expanding product lineup. All this said, management reaffirmed its pledge to achieve "at least a double-digit adjusted operating income margin in 2024", on a €190+ billion topline expectations (according to data collected by Refinitiv).

Valuation Update: Raise TP To $48

Buoyed by robust 2023 results and a promising outlook for 2024, I am updating my STLA valuation framework in alignment with analyst consensus EPS estimates through 2026 (According to data collected by Refinitiv): My updated analysis suggests that Stellantis' EPS for 2024 should likely fall somewhere between $5.5 and $5.9. Additionally, I adjust my EPS projections for 2025 and 2026 to $5.74 and $5.68, respectively. Although these estimates are slightly higher than consensus, I emphasize that they remain within +/-10% of the consensus EPS figures reported by Refinitiv. This adjustment reflects my observation that analysts' EPS revisions have consistently underestimated Stellantis' performance over several quarters. Meanwhile, I maintain my 0% terminal growth rate projection; but I lower my cost of equity assumption by 200 basis points, down to 10%. This revision is intended to mirror both the anticipated decline in interest rate benchmarks, as suggested by Refinitiv, and a more favorable outlook towards the automotive market at large, including diminishing concerns surrounding the disruption potential of battery electric vehicles (BEVs).

Following the updated EPS projections, my calculation of Stellantis' fair value per share increases to $48.2, compared to $44.75 estimated previously.

Below is also the updated sensitivity table.

Investor Takeaway

Stellantis has delivered impressive results for the fourth quarter and the full year of 2023, achieving a 6% increase in revenues and a 12% rise in net income YoY. Looking ahead to 2024, Stellantis management is optimistic about maintaining strong commercial and macroeconomic momentum, which is expected to drive a double-digit operating margin from a revenue base of over €190 billion. Furthermore, the company has announced plans to return €7.7 billion to its shareholders, marking a 16% increase from the previous year and corresponding to an 11% yield. This generous distribution underscores the significant upside potential for Stellantis' stock, prompting me to reiterate my "Strong Buy" recommendation with a target price of $48 per share.

Cavenagh Research