Linear Motion

In an age marked by dynamic transitions within the automobile industry, investment opportunities abound. Yet not all are created equal.

Both consumers and policymakers are clear in their direction, creating an environment where electric vehicle (EV) adoption is not just an innovative leap, but a fundamental requirement for continued relevance.

However, the immense financial demands ranging from research and development to infrastructural evolution require a strong financial backbone. Economies of scale play a decisive role. Automakers that can produce on a grand scale can more efficiently absorb and distribute the costs of the EV transition. These are the manufacturers whose financial health and growth trajectory promise resilience and adaptability amidst industry upheavals.

For the discerning investor, the case is clear: bet on the giants who are financially equipped to champion the EV revolution. Today, we are adding one such company to our Smart Investor holdings.

But first, let us delve into a short update on the economy, markets, and Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days:

  • Later today, we will receive a report on August’s ISM Services PMI, which supplies a detailed view of the services sector of the U.S. economy and serves as a leading indicator for economists and policymakers.
  • On Friday, we will see data on the Q2 2023 Non-Farm Productivity, measuring output per hour of labor and thus helping discern near-term, as well are long-term GDP growth trends.
  • Also on Friday, we will get a report on Unit Labor Costs, which reflects the price of a unit of production in terms of wages and helps uncover inflationary or disinflationary pressures coming from wages.

As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is drawing to a close, with only Oracle (ORCL) scheduled to publish its quarterly results next Monday.

The ex-dividend dates for Autoliv (ALV), Occidental Petroleum (OXY), and UnitedHealth (UNH) are on September 6th, 7th, and 8th, respectively.


Today, we are adding a European (U.S.-traded) giant which owns 14 of the most valuable and globally popular auto brands. The company we are adding has stellar finances and has been growing its revenues and earnings at a fast clip; meanwhile, it is highly undervalued, which provides investors with an exceptional opportunity to find growth and value in one stock.

To make room for this valuable addition, we are letting go of the stock of another Europe-based company that also works in the automotive sector, although in a different industry. The stock we are selling has brought a significant gain since purchase, but we feel that its further upside potential has diminished.


New Addition: Stellantis (STLA)

Stellantis N.V. is one of the world’s largest automotive corporations. The multinational group consists of 14 auto brands: Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram, and Vauxhall. The conglomerate also includes two mobility arms offering innovative connection solutions: a car sharing company, Free2Move, and a multi-brand operational leasing company, Leasys.

Stellantis was formed in 2021 based on a 50/50 cross-border merger between the Italian-American conglomerate Fiat Chrysler Automobiles (FCA) and the French PSA Group, the owner of the Peugeot automobile brand.

Fiat Chrysler Automobiles NV (FCA) was an Italian-American multinational corporation resulting from the merger between Fiat S.p.A. and Chrysler Group LLC in 2014. Groupe PSA (Peugeot S.A.) was a French multinational automobile group, formed in 1976 when Peugeot S.A. acquired Citroën. So, the history of Stellantis can be traced back to 1925, the formation of Chrysler in Detroit, or even to 1896, when Peugeot was established in France.

In its current conglomerate form, Stellantis is the fourth-largest automaker in the world by production volume, behind only Toyota (TM), Volkswagen Group (VWAGY), and Hyundai Motor Group (HYMTF). The company commands a market capitalization of $57 billion and annual revenue of $180 billion. It has a workforce of about 300,000 employees, a presence in over 130 countries, and manufacturing facilities in 30 countries.

The company is headquartered in the Netherlands. STLA’s largest market by sales volume is Europe, accounting for 45% of total sales; North and South Americas are responsible for 31% and 15% of sales, respectively. Stellantis’ stock is traded on NYSE, as well as on Euronext Milan and Euronext Paris stock exchanges.

The merger of two auto groups into Stellantis was aimed at addressing the challenges faced by the global automobile industry. The “paradigm shift” into connected, autonomous, shared, and electric technologies requires increasingly larger investments needed to perform strategical changes, build new or modify existing facilities to fit new production requirements, and keep pace with technological developments to stay in the race against the new type of automakers such as Tesla (TSLA). Besides, the consolidation of two auto giants helped reduce redundancies and improve profitability and strengthen the company’s financial metrics.

The resulting conglomerate’s financial health is no less than perfect. Its debt-to-equity ratio has been reduced to a low 35%, with short-term assets exceeding both short- and long-term liabilities. STLA’s debt is extremely well-covered by operating cash flow, while the cash and cash equivalents it holds are a multiple of its debt.

Stellantis’ debt-service costs are low, since its long-term debt is highly rated at “BBB+,” which means that credit rating agencies and investors view the company as carrying a very low risk.

STLA’s strong financial profile is supported by its solid and resilient profitability and cash flow generation ability. The company boasts a Return on Equity (ROE) of 27% and a Return on Assets (ROA) of 9.5%, much higher than the sector’s averages. The company has a Return on Invested Capital (ROIC) of 18%.

Stellantis’ margins confirm its robust standing on profitability and efficiency metrics, as well as in generating value for its shareholders. STLA’s EBITDA margin of 15%, operating margin of 12.5%, and net profit margin of 10.4% surpass these of most of its peers, despite Stellantis’ higher exposure to mass market segments than the average for the comparable companies.

STLA is a highly efficient and well-managed company. Despite challenging market conditions such as rising labor, production, and logistics costs, as well as slightly lower sales volumes, the company’s revenues increased by 18% in 2022. That was the result of the company’s strong market position, allowing it to raise vehicle prices to more than cover rising expenses. In the past three years, revenues surged at a CAGR of 50%, while EPS grew at a CAGR of 35.5%.

Like many Europe-based companies, Stellantis reports its financial results semi-annually. In H1 2023, the company’s EPS surged by almost 170% year-on-year, beating analysts’ estimates by a wide margin. The company has surpassed all but one of its semi-annual EPS targets since it began reporting as Stellantis N.V.

In H1, as opposed to 2022, most of the increase in net earnings was attributable to higher sales and not to increasing prices. In this period, compared with H1 2022, while net revenue rose 12%, net profit jumped by 37% to a record $12 billion. The company reported an increase of 36% in cash from operations and ended the first half with $54 billion in cash on hand, up 6% year-on-year.

Despite the current challenge stemming from the U.S. autoworker union’s wage increase demands, aimed at Stellantis, Ford (F) and General Motors (GM), the company has significant financial room to handle the situation. Outweighing the possible negative short-term consequences stemming from the labor dispute are the expected positive effects emanating from the global governments’ strife to curb carbon emissions. In fact, the Biden administration’s recent $12 billion funding program for automakers who agree to retrofit their existing plants for EV and hybrid production, is expected to support both workers and carmakers.

Stellantis is one of the prominent participants of the electrification and autonomation race with the goal of becoming a leader; after the 2021 merger it upped the ante, adding new effort to the base created by the merging entities. Its electric variations of Peugeot, Opel, and Fiat already rank among the best-selling cars in Europe. STLA is already the leading supplier of commercial EVs in Europe, and third-largest seller of regular EVs on the continent, despite the stiff competition from cheap Chinese electric brands. The European Union is the global leader in EV subsidies, so that Stellantis has a great growth opportunity in its home market. However, the electrification and autonomation is accelerating around the globe, with the U.S. now planning numerous support measures to help achieve its plans to make half of the fleet electric within a decade.

STLA’s wide economic moat and diversification help it succeed in the extremely competitive EV sphere of the incredibly competitive automotive market. In the first half of this year, STLA’s global sales of battery vehicles rose 24% year-on-year, while and low-emission vehicle (primarily hybrid) sales increased by 28%. The company plans to introduce more than 45 EVs with a target sales volume of one million by the end of next year.

One of the now apparent advantages of STLA’s strategy is its much lower presence in the Chinese market than that of its peers, which minimizes the hit to top lines from the Asian economy’s weakness in terms of demand, as well as the effort needed to achieve relevance in the highly competitive low-margin EV market in China. However, the company is considering entering the local market through a partnership with a Chinese company.

With its pristine balance sheet, exceptional profitability, and stellar execution, it is no wonder that Stellantis’ stock has been drawing investors’ attention lately. STLA (NYSE-traded security) has risen 43% in the past 12 months, versus the S&P 500’s (SPX) 5.7% increase. Hedge funds, other institutional investors, and individual investors have been heavily adding to their exposure to the stock in recent months.

Despite that, the company’s valuation remains strikingly low, even by the European automakers’ valuation standards. The stock currently trades at a TTM P/E of 2.65 and a Forward P/E of 2.84, representing about 50% discount to its European and U.S. peers. The company appears strongly undervalued versus the historical valuation of its merging components, as well as versus its fair value.

TipRanks-scored top analysts foresee an average upside of 34.2% for the stock in the next 12 months. Stellantis carries a “Perfect 10Smart Score rating on TipRanks with a “Strong Buy” recommendation:

Notably, STLA pays a cash dividend with a yield of an eye-popping 7.5%; however, its dividend history is too recent to consider it an income stock. In addition, the company rewards its shareholders with generous buybacks. In H1 2023 it repurchased $0.7 billion in shares and plans to complete its $1.7 billion buyback program by the end of the year.

To conclude, Stellantis N.V. is a highly profitable and effective company with a proven track record of stellar execution on its aggressive business strategy. Since the company is expected to continue pursuing high revenue growth, while its stock is extremely undervalued, we view STLA as a combination of growth and value investment, with a strong potential to add income to the mix. In short, we consider STLA a highly valuable “buy and hold” addition to the Smart Investor portfolio.


New Deletion: Autoliv (ALV)

Autoliv, Inc. engages in the development, manufacture, and supply of automotive safety systems. It operates through the Passive Safety and Electronics segment. The Passive Safety segment includes airbags, seatbelts, steering wheels, and restrain electronics. The Electronics segment comprises of restraint control systems, brake control systems and active safety.

The company was founded in 1953 and is headquartered in Stockholm, Sweden. It has a market capitalization of $8.4 billion, and a geographical presence in the Americas, Europe, and Asia. The company’s shares are listed on NYSE and on Stockholm stock exchange.

ALV’s financial health is robust, albeit far from perfect. Although its debt-to-equity ratio of 70% is quite high, the company has been reducing its debt load and intends to continue doing so in the future. The company’s profitability metrics are mediocre: its ROE is a medium-low 15.3%, while its ROA is similar to the average for its industry at 5.7%, its ROIC is quite low at 9.6%. What’s more worrying, though, are the company’s low operating and net profit margins, which leave it with little room to adjust to any adverse developments.

The company’s average annual revenue growth was 11.5% in the past three years, with a high quarter-on-quarter volatility; even higher volatility was present in its net earnings and EPS outcomes. ALV’s performance vis-à-vis analysts’ projections was also uneven, with five out of ten latest quarterly EPS results missing the estimates. However, it must be said that the latest quarter was exceptionally good for the company, with the actual result surpassing the estimates by a wide margin.

Autoliv’s stock has risen 33.5% in the past 12 months, and 37% since we purchased it for the Smart Investor portfolio in February, although it has experienced outsized swings on the way to these results. Lately the sentiment towards the stock has somewhat soured, and while hedge fund activity has been neutral on average, individual investors have reduced exposure.

Last year’s increase in the stock price has brought ALV to moderately overvalued levels, with the TTM P/E of 22.0 and the Forward P/E of 16.1, placing it at the top of the valuation range of its peers.

All in all, Autolive is a viable and profitable company, but we believe that it would need to display stronger profitability metrics and a higher earnings growth rate to justify these valuations.

TipRanks-scored top analysts have updated their forecasts and now foresee an average downside of 1.4% for the stock in the next 12 months. Looking at the company’s data, we must agree with this outlook. Therefore, we find it prudent to take the profit and cash out.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Although the Winners Club is saying goodbye to one of its members, ALV, its ranks have not shrunk as ANET, with a gain of 30.3%, is replacing the outgoing stock. Now, the exclusive club includes GE, ORCL, TECK, AVGO, CDW, and ANET.

The closest runner-up is WCC, although it is still far below the threshold with a gain of 16.8% since purchase. Will it be able to close the gap, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, September 13th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
STLA Sep 6, 23 $18.26

New Portfolio Deletions

Ticker Date Added Current Price % Change
ALV Sep 21, 22 $98.35 +37.86%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $112.88 +102.00%
ORCL Dec 21, 22 $123.98 +52.12%
TECK Dec 8, 21 $41.80 +50.25%
AVGO Mar 22, 23 $872.17 +38.24%
CDW Jun 29, 22 $212.64 +34.51%
ANET Jun 21, 23 $197.46 +30.33%
WCC Sep 14, 22 $156.67 +16.78%
AMAT May 31, 23 $153.61 +15.24%
GD Dec 22, 21 $223.33 +9.60%
PERI May 17, 23 $33.79 +8.09%
INMD Jun 28, 23 $38.91 +6.14%
ACN Aug 16, 23 $326.16 +6.02%
DAL Feb 8, 23 $41.76 +5.88%
ADM May 10, 23 $78.88 +5.68%
CHKP Jul 19, 23 $133.85 +5.13%
MOH May 3, 23 $312.72 +4.40%
CI Jul 12, 23 $278.75 +3.74%
JBL Jul 5, 23 $112.76 +3.27%
APD Apr 26, 23 $292.70 +2.46%
TSM Aug 23, 23 $94.60 +0.86%
VRTX Aug 2, 23 $348.26 +0.15%
APH Aug 9, 23 $87.97 -0.53%
TDY Aug 30, 23 $412.90 -0.80%
UNH Apr 19, 23 $480.81 -1.11%
OXY Oct 5, 22 $66.18 -2.30%
ALG May 24, 23 $169.80 -3.07%
DE:IFX Apr 5, 23 $32.97 -7.11%
EPD Jan 15, 20 $26.72 -7.61%
WNC Mar 15, 23 $22.17 -8.27%
GPK Jul 26, 23 $21.84 -8.81%
ALB Jun 14, 23 $200.80 -11.31%
LW Apr 13, 23 $96.86 -11.52%


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