Value Investor Daily #50

Car manufacturers are trading at super cheap multiples right now. What’s going on?

Six auto manufacturers are trading for less than three times cash flow right now.

Is there an opportunity here? Let’s take a look.

Of those stocks above, only GM (GM) is higher this year, up 27% YTD.

Stellantis (STLA) is down the most, 42% YTD. It has the lowest price-to-cash-flow of the group, 2.55x.

Stellantis is the owner of Dodge, Jeep, and Chrysler. The company recently lowered its guidance.

It was expecting positive cash flow for the year, but it’s now forecasting negative 5 to 10 billion euros.

GM, Ford, and Toyota all dropped on the news.

Stellantis faced several challenges in Q2 2024 that led to disappointing sales and cash flow results, which they discussed on the latest earnings call:

• Headwinds: The company experienced a "perfect convergence of several headwinds" including high R&D and M&A expenses, operational flaws, and ineffective marketing tactics in the U.S. market .

• North America Performance: Decline in Adjusted Operating Income margin to 11.4% and a drop in market share to 8.2%, with around 100,000 units of shipments lost due to discontinuation of certain vehicles.

• Revenue Decline: Consolidated shipments were down 10% in H1 2024, leading to a 14% decline in net revenues.

• Negative Free Cash Flow: The negative industrial free cash flow of €400 million in H1 was attributed to lower AOI, higher investments, and working capital impacts.

The company has been slow to offer price incentives. Inventory at car dealer lots is rising, now averaging 56 days, up from a low of 25 days in 2022.

TTM sales are down 9% YoY to $187 billion.

Free cash flow is down TTM.

The CEO announced that the company is releasing 20 new cars this year to address the demand problem. They’re also “looking at the incentives and any price adjustments that will be eventually needed.”

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