Story Stocks^®

Stellantis (STLA -14%) swerves to late 2022 lows after a global industry backdrop ripe with potholes prompts the prominent automotive manufacturer to lower its FY24 guidance today. The OEM known for many brands, including Chrysler, Dodge, Jeep, and Alfa Romeo, slashed its FY24 adjusted operating income margins to 5.5-7.0% from its previous double-digit forecast issued in late July and industrial free cash flow to negative €5.0 bln to €10.0 bln from its prior view of positive FCF.

• What happened to spur such a sharp shift in sentiment so quickly? Management commented that the updated guidance reflected its decision to significantly bolster its remediation actions on North American performance issues and a broader deterioration in global industry dynamics.
• STLA's remediation actions include accelerating its inventory normalization in the U.S., eyeing at most 330,000 units of dealer inventory by the end of 2024 instead of by the end of 1Q25. To achieve this, STLA will reduce its North American shipments by over 200,000 vehicles during the back half of this year versus the year-ago period, double what it previously targeted. Additionally, the company will increase its incentives on current and older model-year vehicles. STLA is also continuing its cost-savings programs.
• These actions are being sparked by a nasty combination of fading demand and increasing competition, especially in China. Furthermore, inventories are rising, giving potential car buyers plenty of options to weigh at the dealer.
• STLA warned of brewing issues just last week, commenting that market forecasts were moving slightly more negative, with global growth going from +1-2% at the beginning of the year to negative 1-2%. STLA added that North America was a particular pocket of weakness. Furthermore, STLA remarked that inventories are generally higher, pointing to the U.S. as a particular problem area.

However, STLA did not alter its guidance last week or convey an overly concerning tone, adding that it is making progress on inventories and repeatedly expressing excitement over 2025. As such, its considerable guide-down came as a massive shock today, producing a tremor across the automotive sector, weighing on OEMS, from General Motors (GM) and Ford Motor (F) to Honda (HMC) and Toyota (TM). Similarly, semiconductors with meaningful exposure to the automotive sector, such as On Semi (ON) and NXP Semi (NXPI), are pulling back today.

While it is difficult to find much in the way of a silver lining, STLA is far from a doomsday scenario. For starters, even though it could take time, the Federal Reserve has shifted its monetary policy, cutting interest rates to help ease consumer financing costs. Furthermore, STLA's actions amount to ripping the Band-Aid off instead of slowly right-sizing inventories and cutting costs. This should help put it in a better position to start the new year, which has been its top priority for some time.

Still, today's slashed guidance is concerning. Until concrete numbers support STLA's aggressive initiatives, investors could continue sending the stock in reverse.