Consider Stellantis For Your Next EV Purchase

While the rivalry between Detroit's two most famous companies is fun to watch, the company that owns Chrysler has better shareholder returns than the company that owns the other

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In terms of profit, the U.S. automaker with the most profits is Chrysler, which is often referred to as Detroit's third wheel by investors.

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Stellantis STLA 3.48% increase; green up pointing triangle, the North American division of the automotive group, generated an adjusted operating income of approximately 14 billion euros last year, about $14.9 billion at today's exchange rate. The company operates brands such as RAM, Jeep, and Dodge, which are roughly equivalent to Chrysler's legacy business. Compared to General Motors GM -0.78% decrease; red down-pointing triangle; Ford F -0.04% decrease; red down-pointing triangle, the comparable numbers for Ford F -0.04% decrease; red down-pointing triangle were $13 billion and $9.2 billion, respectively. Unlike other companies, Tesla does not split its business geographically, but it generated a profit of $13.7 billion on a global scale.

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With Stellantis's other operations in Europe and South America, which are also big in terms of revenue and market share, there is a growing distance between the company and its counterparts in the U.S. As of last year, the company had a global adjusted operating income of €23.3 billion, a 29% increase from 2021. Combined with the synergies that came from the merger of Fiat Chrysler and Peugeot roughly two years ago, the company was able to boost its profit in a meaningful way when its traditional rivals were unable to do so.

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However, Stellantis's financial clout cannot be matched by its stock market performance. The market value of the company is currently a little higher than Ford, but it is behind GM-not to mention Tesla, a special case. The fact that investors are willing to pay higher prices for a dollar of profit at Ford or GM even though Stellantis is growing its profit faster speaks volumes about the persistence of a valuation discount. GM trades on about seven times expected earnings, Ford trades on eight times and Stellantis trades on less than four times.

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There is one simple explanation for this: visibility. While GM and Ford are popular with armchair investors, Stellantis isn't one of them. As a two-year-old company with a complex backstory, it lacks a single iconic brand to convey its message to the public. There is also the problem that it reports results in an old-fashioned French way that was inherited from Peugeot-not only in euros, but also only twice a year, with quarterly sales reports for the first and third quarters.

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There is also the possibility that technology could be a factor contributing to the low valuation. There has been a lot of success for the company in Europe with electric vehicles. However, in North America, the company has focused on the hybrid vehicles that it offers. Despite the fact that this is proving to be a very lucrative business right now, as GM and Ford compete fiercely on pure electric vehicles, some investors might worry that Stellantis is underinvesting in future generations of cars. The company's capital expenditures for the past year were low, at €8.9 billion, compared to €10.1 billion in 2021, a decline of nearly 40%.

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Investors were desperate for technology exposure a few years ago, including in Detroit, but this explanation is less compelling now. Car companies are no longer able to boost their stock prices by promising to invest tens of billions of dollars in EVs in the hope of boosting their stock prices. Furthermore, Stellantis has followed its peers in developing dedicated EV manufacturing platforms and joint ventures with battery manufacturers, narrowing the strategy gap between the company and its peers, despite the fact that its products will still come out later than those of its competitors.

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As Chief Financial Officer Richard Palmer explained, part of the decline in capital spending last year was due to the timing of investments, and part of it was due to synergies that were higher than expected. It is estimated that of the €7.1 billion saved as a result of the merger so far, approximately €4 billion is related to capital expenditures and R&D expenditures.

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In summary, there are no good reasons why Stellantis shares trade at such a big discount, but that doesn't mean it will close anytime soon. This means that investors get a lot of capital back for the money they have invested: On Wednesday, the company declared dividends and share buybacks worth €5.7 billion, or 11% of its market capitalization in dividends and share buybacks. The shareholders of Stellantis will also continue to benefit from the synergies generated by the merger, which should offset the negative effects of a more challenging operating environment for Stellantis this year in terms of profits.

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It would have been very good to have bought Stellantis and sold either GM or Ford as part of a pair trade over the past year. If 2023 turns out to be a good year for Detroit, then it could continue to work.

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