RBC Capital analyst Tom Narayan downgrades Stellantis (NYSE: STLA) from Outperform to Sector Perform, lowering the price forecast for the Paris-listed stock to 13 euros ($14.25) from 17 euros.
The analyst notes that if the company can resolve its inventory issues without sacrificing prices, margins could rebound to double digits, which would be competitive with Ford Motor Company (NYSE: F) or General Motors Company (NYSE: GM).
Stellantis' U.S. dealer inventories improved in September, decreasing to 90 days from 94 in August and 109 in July, with a goal of reaching the mid-70s by year-end.
A concern for investors is that pricing may need to decrease in the second half of the year if production cuts prove insufficient, Narayan notes.
If the company reduces its inventory by 200K, it could balance out the overcapacity from 2023, leading to a 200K increase in volumes for 2025. The return of the Dodge Charger in the U.S., after selling about 100K in 2023, could add another 50-100K in sales.
The analyst has revised earnings before interest and taxes (EBIT) margin estimates for the second half of the year to 2.8%, down from 9.1%, and reduced the 2024 EBIT margin forecast to 6.6% from 9.5%.
For 2025, the analyst no longer assumes the 2.8% second-half 2024 run-rate and now forecasts EBIT margins at 6.5%, down from 9.5%.
The analyst, however, remains optimistic about the stock's long-term potential, citing its limited exposure to China, strong positioning in Europe regarding CO2, and a solid product lineup in the U.S.
However, as mentioned in the RBC Elements analysis, Narayan specifically cautioned that downward pricing pressure is likely, which could further impact already revised FY25 estimates. The analyst moves to the sidelines for now.
Price Action: STLA shares are trading higher by 1.83% to $13.32 on the NYSE at last check Friday.