RBC Capital analyst Tom Narayan has downgraded Stellantis (STLA) from Outperform to Sector Perform, raising concerns about the company’s inventory levels and the potential for price reductions. Narayan points to the possibility that Stellantis may need to cut prices in the latter half of the year to clear its inventory surplus. While the company has seen some improvement in its U.S. dealer inventories, decreasing from 109 days in July to 90 days in September, it aims to reach the mid-70s by year-end.
However, Narayan believes that if production cuts prove insufficient, Stellantis may be forced to lower prices to move its inventory. This potential for price discounting could significantly impact the company’s margins and profitability, particularly given its already revised earnings before interest and taxes (EBIT) margin estimates for the second half of 2024. These estimates have been lowered to 2.8%, down from 9.1%, with corresponding reductions in 2024 and 2025 EBIT margin forecasts.
Despite the downward revision, Narayan remains optimistic about Stellantis’ long-term potential. He highlights its limited exposure to the Chinese market, strong positioning in Europe regarding CO2 emissions, and a robust product lineup in the U.S. However, he acknowledges the downward pricing pressure as a significant concern, potentially impacting the company’s profitability in the coming years.
The downgrade signals a cautious stance from the analyst, who believes the stock warrants a wait-and-see approach. This decision comes as Stellantis continues to navigate a challenging market environment marked by supply chain disruptions, rising inflation, and fluctuating consumer demand. The company’s ability to effectively manage its inventory and maintain pricing power will be crucial to its future performance.
