Today's significant decline in Stellantis' stock price is causing concern.
In the face of persisting financial difficulties, it's unfortunately not unexpected, yet still shocking in black and white, that investors have experienced a jolt. Shares of automaker Stellantis (STLA 1.53%) are deeply in the red on Monday, plummeting 12.9% during midday trading, following the company's update lowering its operating margin and cash flow projections for the current financial year.
The company's statement mirrors recent cautions issued by fellow European automakers Volkswagen (VWAP.Y 1.44%) and Mercedes-Benz (MBGY.Y 0.82%).
Stellantis slams on the brakes for profit
Responding to underperforming sales in the second half of the year in most regions (specifically issues in North America), Italy-based Stellantis expects its operating income margin rates for fiscal 2024 to range between 5.5% and 7%. This represents a significant drop from its previous profit-margin guidance of double digits.
The company also anticipates a decline in cash flow. Stellantis notes that its previous 2024 prediction of "positive" free cash flow has been revised to negative free cash flow of between 5 billion and 10 billion euros.
And they're not alone. Volkswagen released a similar warning last Friday due to a demanding market environment affected by ongoing inflation, sky-high interest rates, and even the potential looming threat of a recession. A week prior, Mercedes-Benz announced that its full-year profit margins would only reach roughly 7.5% to 8.5%, a significant decrease from its earlier 10% to 11% projection. Like Volkswagen and Stellantis, Mercedes notes weak demand and heightened competition as factors contributing to its lowered expectations, with China being a particular concern.
The data supports the argument that automobile manufacturers are currently on the defensive. Both domestic and international sales of new vehicles have been weakening since the middle of last year.
Not imminent, if at all
Although the sheer scale of it is alarming, forward-looking investors may view Monday's tumble in Stellantis stock to a fresh 52-week low as a tantalizing opportunity.
But steer clear.
Despite the strong appeal of Stellantis' brands, such as Dodge, Jeep, Fiat, and Chrysler, the overall industry is grappling with more significant challenges than it can simply dismiss. Even in a more robust economic climate, the automobile industry may no longer be a growth industry but rather a stagnant one, as alternatives to owning vehicles, like ride-hailing, grow increasingly accessible. At the very least, it's crucial to wait until companies like Stellantis start showing solid revenue and profit growth before making an investment move.
The financial difficulties faced by Stellantis and other automakers like Volkswagen and Mercedes-Benz have led investors to reconsider their investing strategies in this sector. With operating income margin rates expected to decline and negative free cash flow projected for Stellantis, careful consideration of risk and future growth potential is necessary before making investment decisions in the money-strapped automobile industry.
