Automaker Stellantis (STLA) recently received a government grant to convert one of its factories to an EV manufacturing facility. The company’s EV business is quite profitable and the grant helped improve investor sentiment. But some recent setbacks have dampened the hype and given investors a reality check of the company’s dying traditional car-making business.
Stellantis is a major global automotive company that boasts several iconic car brands. Formed from the merger of Fiat Chrysler and PSA Group in 2021, its brands encompass well-known names including Peugeot, Ram, and Jeep. With these diversified brands, the company targets a wide array of customers across the globe.
In addition to selling cars, the company has diversified its revenue streams through financing, insurance services, and accessories and spare parts business. This diversification, however, hasn’t helped the company protect itself from an industry-wide downturn
Revised guidance stuns investors
The automaker has made several changes to its forward guidance this week which has left many investors stunned, causing the stock to plummet 14% so far this week.
As per the new guidance, the adjusted operating margin is now expected to fall somewhere between 5.5% and 7%, which is half of the double-digit guidance that was expected before the revision.
Similarly, a free cash flow that was expected to be positive by the end of the year is now expected between -5 to -10 billion euros.
The Biden administration awarded the company a $334.8 million subsidy in July this year for converting its Belvidere assembly plant to an EV manufacturing plant.
That subsidy now pales in comparison to the lowered guidance, prompting many to wonder if the company will be able to survive the slump in internal combustion engine vehicle sales.
Moreover, the carmaker has also announced a recall of over 194,000 hybrid SUVs due to a potential fire risk. This is in addition to the 2.7 million vehicles that the company has recalled since June.
Labor strikes on the horizon
Stellantis also faces challenges on the labor front, with many of its workers threatening to go on strike due to the company’s failure to deliver on promises made last year. Around this time last year, workers successfully negotiated a 25% pay rise among other benefits, though they now seem disgruntled again claiming the company didn’t deliver on the promises.
The company’s healthy dividend yield has usually attracted investors and allowed existing investors to stay comfortable holding the stock. However, the blow to the company’s cashflows could force the management to rethink its dividend payout policy.
With the heavy baggage of a dying industry on its shoulders, the little encouragement available in the company’s EV efforts is unlikely to impress investors, strengthening the bear case for the stock.
Stellantis is not in our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 31 hedge fund portfolios held STLA at the end of the second quarter which was 35 in the previous quarter. While we acknowledge the potential of STLA as an EV investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as STLA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and A New Dawn Is Coming to US Stocks.
Disclosure: None. This article is originally published at Insider Monkey.