(News Bulletin 247) – The heavy profit warning issued on Monday called into question a reputation for excellent execution that the group took years to build. Carlos Tavares’ company must now demonstrate that it can limit this gap as much as possible to win back investors.

In the market as in love, a relationship of trust built over many years can find itself weakened in the blink of an eye. Stellantis and its general director, Carlos Tavares, have had the bitter experience of this for several months now.

On Monday, the car manufacturer with 15 brands fell 14.74% on the Paris Stock Exchange, the biggest drop in its young stock market history, the company being born in January 2021 from the merger of Fiat Chrysler and Peugeot SA. This brings the decline in Stellantis shares to 40% over the whole of 2024, the second largest in the CAC 40. And to think that in 2023 the manufacturer had the best performance in the Parisian index (+59% ).

Rarely, if not never, has Carlos Tavares’ record seemed so splashed. Since his arrival at Peugeot SA in 2014, the manager has successfully applied a method based on rationalizing the number of models (too numerous at the time he took charge), emphasizing pricing power (power of pricing) and cost prowess. This famous “Tavares method” allowed him to relaunch PSA, but also to turn around Opel-Vauxhall, bought in 2017, in record time.

So much so that after the failure of the engagement with Renault, John Elkann, inheritor of the Agnelli family, will choose to unite Fiat Chrysler with a PSA at the height of its glory, at the end of 2019. It is also this method which made it possible to extract as quickly as possible the synergies from the merger between the two manufacturers, estimated at 8.4 billion euros over a full year. Last year, the current operating margin stood at 12.8% (and more than 14% in the first half), an almost unattainable level for a “mass market” manufacturer.

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Signals from spring

But these feats of arms do not carry much weight in the face of the recent disappointments caused by Stellantis. As early as April, the financial director, Natalie Knight, warned that the group’s margin in the first half of the year would be between 10% and 11% in the first half, compared to more than 14% a year earlier.

A few months later, when publishing half-year results, Stellantis published accounts in free fall, the margin barely reached 10% (Deutsche Bank even calculated it at 7.8% by eliminating accounting adjustments). Carlos Tavares then recognizes that the company has not been able to do what is necessary to reduce its inventories in the United States, the high level of which has been worrying investors for several months. Stellantis, however, still intends to generate a double-digit current operating margin in 2024 and generate positive industrial cash flow.

On Monday, market fears were crystallized by Stellantis’ profit warning. Exit the double-digit margin, Stellantis now retains a rate of 5.5% to 7% for 2024. As for cash flow, the group expects to burn between 5 billion and 10 billion euros in industrial cash flow. Which also worries analysts about the return to the shareholder (dividends and share buybacks), which constitutes an asset of Stellantis.

“The balance sheet is strong enough to cope with this year’s negative free cash flow situation, in our view, however, the outlook for an attractive capital allocation has deteriorated significantly and needs to be reassessed,” emphasizes, on this point, UBS this Tuesday.

This warning is explained by a world market that is certainly more complicated but above all by the “corrective measures” taken to reduce American stocks. Stellantis will notably increase promotions to reduce its stocks.

“In addition to the price reductions already made, it appears that Stellantis will provide additional assistance to its dealers to reduce their unsold inventory of 2023 and 2024 models so that they can accept 2025 models that appear accumulate in Stellantis sites,” explains Bernstein, who attended a meeting with the group’s investor relations Monday afternoon.

Sales to the American network will also decrease to 200,000 units in the second half of 2024. “It seems that the measures are focused on volumes and more particularly on production measures in North America, as opposed to significant discounts”, judge Royal Bank of Canada.

“A radical turnaround”

The warning issued by Stellantis took analysts by surprise. As early as July, Deutsche Bank warned that the manufacturer’s difficulties were only just beginning and that the company’s objectives were “at risk”. But even the German bank was “surprised” by the extent of this warning on Monday.

The independent research firm Alphavalue abandoned its purchase advice on Tuesday, switching to “lighten” and expecting the group’s difficulties to persist.

Oddo BHF lowered its advice from “outperform” to “neutral” on Monday. The design office says it “lost faith and confidence” in the company following the “profit warning”. Oddo BHF evokes a shock which “raises important questions about the visibility of management on the activity (…) and its credibility with investors.

“In our opinion, given its scale, such a warning should have been issued much earlier (the current operating margin in the second half is now close to the break-even point, compared to more than 10% in previous forecasts),” continues the design office.

“This therefore raises too many questions about the governance at the head of the group for us to expect a rapid recovery and confirms that the confrontational approach adopted with all stakeholders (employees, dealers, suppliers, governments and now even investors) was not the right one,” he asserts.

Bernstein points to a certain inertia on the company’s side on the issue of American stocks. “For almost nine months, Stellantis management has expressed its belief that only limited corrections are necessary in the North American market. The downgrade of the outlook (Monday), which mainly consists of lowering forecasts for North America, marks a radical turnaround,” says the design office.

Relaunch the machine in 2025

Stellantis must now regain its popularity with the market and restore its image in terms of execution.

“Stellantis will need to reestablish its credibility with investors. Management credibility and a strong outlook were key factors for investors that led to a 60% increase in the stock price in 2023 and more than filled the gap. valuation gap with General Motors and Ford, the late admission of the extent of the problem and the notable absence of management during today’s conference call (Monday, Editor’s note), and the questioning of the pricing discipline will require a significant effort to restore confidence in the future,” Bernstein says.

To achieve this Stellantis has no real choice but to apply the good old market formula: say what you do and do what you say. “To the extent that Stellantis can isolate production measures in the second half of 2024, bring volumes back to 2025 and maintain prices, all can be forgiven,” judges Royal Bank of Canada. According to the Canadian bank, demonstrating that “corrective measures” on stocks will not weigh much beyond 2024 could help convince the market.

Bernstein is more cautious. If the lowering of Stellantis’ forecasts now avoids unpleasant surprises for 2024, the research office considers that the company still has “holes in its portfolio” of products for 2025 to resist the slowdown in electricity. Notably the absence of mid-size pick-ups.

UBS is also worried. The Swiss bank estimates that the consensus (the average forecast of analysts) for current operating profit for 2025 risks being lowered. “Despite the high production rate, it seems increasingly difficult for Stellantis to return to a double-digit current operating margin in 2025,” judges the Swiss bank.