Why Stellantis and Renault remain undervalued in the stock market, despite record profits

It’s a cruel paradox for car manufacturers. Two years after the outbreak of the health crisis, followed by other crises (lack of semiconductors, the war in Ukraine, etc.), their stock market prices are still at the level of daisies. And this, while their profits have never been so high. Thus they are able to improve their profits even when sales are improving, or falling.

profits

In Europe, the market is now a third below what it was before the Covid crisis. However, Stellantis significantly improved its profitability, reaching a 14% operating margin. Renault, which makes most of its profits in Europe, even doubled its profit in the first half.

The formula is now known: manufacturers favor models with the highest added value, the best equipment, and especially electric vehicles. In addition, in a restricted market, where demand is struggling to find cars, they stopped all sales discounts.

In France, as elsewhere in the world, sales of new cars continue to fall relentlessly

Stellantis is far from the peak of January

Yes but today, the market is not a buyer. Renault, which generated nearly a billion euros in cash in the first half and doubled its operating margin, is worth less than 8 billion euros on the stock market. Almost more than its 44% stake in Nissan. If we withdraw the very profitable banking subsidiary RCI Bank, there will be nothing left. Stellantis is valued at 44 billion euros. A substantial number, but does not reflect the profit or its balance (26 billion in cash). The group’s action, which resulted from the merger between Fiat Chrysler and Peugeot Citroën, even fell by 27% compared to the peak reached in mid-January. True, prices have increased since the half-yearly publications (+ 11% in Renault since the results, and + 9% in Stellantis), but they are very low.

When comparing the ratios, the Stellantis group is undervalued compared to other stocks in the sector. However, we have not identified any element that would justify this discount, this absurdity for us is equal to the opportunity »suggests Benjamin Sacchet, associate director and wealth manager at Avant-Garde Investment.

The PER (ratio between market capitalization and net profit) is lower than 3. By way of comparison, Volkswagen is at 4, while Renault is greater than 5. The ratio of business value to Ebitda, which more considering the particularly high balance sheet part of Stellantis, also shows a big delay. It is 0.61 while the Cac 40 average is around 9. Again, Renault has a better ratio (1.35).

Stellantis ran out of first-half revenue

Speculative support for Renault

Renault’s share price is supported by the prospect of an IPO (IPO, editor’s note.) of electrical activities scheduled for 2023. So we are in one-off and speculative considerations. Now, Stellantis is cheaper than Renault, it doesn’t make sense “, continued Benjamin Sacchet.

For his part, Frédéric Rozier, portfolio manager at Mirabaud, wonders:

“We have a feeling that Stellantis has already reached impressive levels of profitability, and cannot continue, especially because of the risk of recession and the price cap that will eventually happen. There are many doubts about the more high price”.

And to add: Stellantis’ available industrial liquidity amounts to 60 billion euros with 10 billion euros of Free cash flow in the automotive activity expected again this year. This partly explains the mixed reaction from the markets, which want more generous dividends or, at the very least, a share buyback program “.

For Renault, analysts are less enthusiastic. Although they salute the amazing recovery of the manufacturer, they believe that the group, led by the energetic Luca de Meo, suffers from an irresistible comparison with Stellantis.

Renault: the crisis is over, how Luca de Meo restores the diamond

Debt and cash generation are no longer an issue for Renault. Especially since the group benefited from an interesting effect of the Arkana product and the arrival of Austral, and of course the Dacia box. But if we compare Renault with Stellantis, there is no comparison », justified Frédéric Rozier. Renault has done better, but remains more exposed than its competitor and compatriot Stellantis in the event of a recession. ” The potential is greater with Renault, but so is the risk “, insisted Frédéric Rozier.

A sector plagued by doubts

The main reason for this lack of love for the sector is more due to economic considerations, believes Benjamin Sacchet. ” The market is worried about the consequences of a recession that will occur in 2023, but we believe that the automotive sector is less cyclical than before. Margin levels and balance sheets allow the sector to be more prepared. An analysis shared by Frédéric Rozier: “ the market expects a recession, but at three times the average income, the sector is sold. We can go for a valuation of around five or even six times Ebitda “.

So the automotive sector is far from dead. “ The average age of the car fleet continues to increase, remembers Benjamin Sacchet. It has reached 12 years in the United States, and Europe is approaching this average, while it hovered around 9 years in the 2000s. This is a huge reservoir of growth. »