Elon Musk’s Tesla (TSLA) just reported a sharp fall in electric car sales, despite cutting prices in order to stimulate demand as it faces increased competition, especially in China.
In the first quarter of 2024, Tesla delivered 386,810 electric cars. That was a fifth lower than the fourth quarter of 2023, and 8% lower than the same quarter a year earlier. Wall Street had expected deliveries of about 450,000 cars in the quarter.
Wedbush analyst Dan Ives said, “While we were anticipating a bad quarter, this was an unmitigated disaster that is hard to explain away.”
Tesla’s share price dropped after its sales announcement, extending the plunge in its stock this year to 33%. This extends the stock's run as one of the worst performers in the S&P 500 Index ($SPX) in 2024, with a trajectory that continues to diverge from many of the other “Magnificent Seven” stocks. Tesla’s stock market valuation has halved since it hit $1 trillion in 2021.
Meanwhile, the Big Three automakers are back, at least in the eyes of investors.
Big Three Automakers
As sales of electric vehicles (EVs) lose momentum, investors are reappraising the shares of legacy automakers. This makes sense - gasoline-powered cars and hybrids look set to generate billions of dollars in cash for years to come, while accounting for the majority of vehicle sales.
Shares of these companies were shunned by investors for many years as being “antiques” in the age of EVs. But no longer.
The old-school automakers trade at a significant valuation discount to EV stocks, so for investors looking to own auto stocks, they offer a much greater degree of safety.
Shares of Stellantis (STLA) - Chrysler, Dodge, Fiat, and Jeep are among its many brands - have jumped 15.7% this year, beating the 10% advance in the S&P 500. General Motors (GM) has soared 25.8% this year, while Ford Motor (F) is up 11.3%.
At $530 billion, Tesla’s market capitalization is less than half its 2021 peak. But that still dwarfs the roughly $185 billion combined value of GM, Ford, and Stellantis.
That’s amazing when you consider this: A number of Wall Street analysts say that Tesla’s cash flow would turn negative if it slashes prices an additional 11%, after repeatedly lowering them across its global lineup since late 2022. The price of Tesla’s top-selling car — the Model Y — has dropped 25% since the beginning of 2023, according to Bloomberg Intelligence.
Show Me the Money
When it comes to auto stocks, investors are saying “show me the money.”
Wall Street’s cash-flow projections for those old “antique” car companies are rising, along with estimates for profit and revenue.
In addition, GM, Ford, and Stellantis spent a combined $22.7 billion repurchasing shares and paying dividends in 2023. Tesla, of course, does not pay a dividend, and the chatter about a possible buyback that emerged back in 2022 has disappeared.
Of course, there’s also the incredible gap in valuations. Tesla trades at about 50 times forward earnings. For GM, Ford, and Stellantis, that number is - almost laughably - in the mid-single digits.
I like all three stocks, but if I had to choose just one, I would opt for Stellantis.
Why Stellantis Stock?
The carmaker was born out of the 2020 merger between Italy’s FCA (Fiat Chrysler) and Groupe PSA (Peugeot Citroën). It has raced well ahead of many of its rivals, with its stock rising about 55% in the past three years.
Let’s look at its numbers…
Weaker Stellantis sales in North America, as well as the impact of last autumn’s strikes, saw profit margins across the whole company fall last year, dropping from 13.4% to 12.8%.
However, net profit rose 11%, to €18.6 billion ($20.1 billion), on revenues that were 6% higher at €189.5 billion ($204.8 billion). The company also launched a rather large €3 billion ($3.24 billion) share buyback.
Keep in mind, too, that Stellantis is one of the biggest EV sellers in Europe through its Peugeot, Fiat, Opel and Citroën brands. And it says it’s embarking on an EV “offensive” in the U.S. starting this year, with the launch of eight electric models.
Already, the company’s LEV (low emission vehicle) sales were up 27% in 2023, with PHEVs (plug-in hybrid electric vehicles) at #1 in the U.S. and #2 for LEVs in the U.S. Overall, there was a 21% increase in global BEV (battery electric vehicles) sales in 2023.
Stellantis returned €6.6 billion ($7.13 billion) in cash to shareholders in 2023 through dividends and share buybacks, an increase of 53% compared to €4.3 billion ($4.65 billion) in 2022. The cash dividend proposed was €1.55 ($1.67) per share, an increase of approximately 16% compared to prior year.
Another reason Stellantis stock stepped on the accelerator is that investors like a good turnaround story. Stellantis, post merger, has cleaned up its act. Carlos Tavares, who took over the combined group from his post at PSA, has wielded the ax to achieve enviable operating margins.
The company also has a strong balance sheet with roughly €30 billion ($32.4 billion) of net cash. And it should generate about €11 billion ($11.9 billion) of free cash flow this year after recurring investments.
STLA is a buy under $28.
