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Stellantis Credit Outlook Goes to ‘Negative’ as Woes Mount
Story by Al Root2 min read
Stellantis woes continued early in the week with bond rating agency S&P Global revising its outlook on the auto maker’s debt to “negative” from “stable.”
On Sept. 30, Stellantis slashed its full-year 2024 financial guidance. Of note, free cash flow for the year is expected to be negative $5.5 billion to negative $11 billion. Prior guidance was for positive free cash flow from the company’s car business. (Stellantis, like many other auto makers also makes money from auto loans.)
The problem boils down to mismanaging U.S. dealer inventories. At the end of August, Dodge delears had almost 150 days worth of sales on lots. A safe level is closer to 60 days.
“Stellantis’ change marks the most significant guidance cut among European car makers so far this year, and it implies a material shortfall in terms of profitability and cash flow relative to our thresholds for the ‘BBB+’ rating,” wrote S&P in its notice. “At the same time, we see potential for a meaningful recovery of margins in 2025 mainly due to a rebound in wholesales, on the back of the company’s model offensive, and materially lower incentives.”
The potential for rebound is why ratings stayed at BBB+, three notches above junk status. General Motors debt is rated BBB by S&P. Ford Motor debt is BBB-.
Auto maker debt ratings still fall into the investment-grade category because balance sheets and free cash flow look solid.
When looking at car company balance sheets, it’s important to adjust for the lending operations, which operate a little like a bank inside a manufacturing company. Net of finance operations, GM, Ford, and Stellantis have more cash than debt, according to Bloomberg.
What’s more, all three companies have essentially generated positive free cash every year for the past decade. (Ford generated essentially no free cash flow one year in 2022.)
That’s what made Stellantis warning so surprising. Investors didn’t fully understand how bad things could get. Neither did Wall Street. Before the cut, analyst projected free cash flow of about $5.5 billion. The swing between analyst expectations and the midpoint of company guidance was almost $14 billion.
Stellantis shares have been downgraded three times since the guidance cut. Today, about 38% of analyst covering the company rate shares Buy, according to Bloomberg. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. At the start of the year, about 84% of analysts covering the stock rated share Buy.
While Stellantis tries to dig itself out of inventory problems in the U.S., it has some labor issues to manage too. Monday, the company filed lawsuits against some UAW-represented workers upset with recent production decisions.
The union believes Stellantis isn’t living up to some contractually guaranteed investments. The company feels differently.
Through late trading Monday, Stellantis shares were down about 17% since the warning and down about 43% year to date. Shares were up 0.2% in late trading Monday while the S&P 500 and Dow Jones Industrial Average were down about 0.9% and 1.2%, respectively.
Write to Al Root at [email protected]
https://www.msn.com/en-us/money/top...S&cvid=c18370de1b7043ceaaac37440699c211&ei=22
