Issue #51: A deeply undervalued automobile giant and a company providing the backbone for financial markets worldwide. 🚨

Stellantis N.V. is the world’s 4th largest automaker, sporting a global presence and a portfolio of 16 brands. It features rapid growth, great fundamentals, and a clear road map to developing competitive electric and hydrogen fuel cell vehicles.

International Exchange Inc. operates electronic platforms, exchanges, data supply, and other services to markets trading equities, commodities, derivatives, currencies, bonds, and other financial products. The Company owns the NY Stock Exchange and holds a dominant position in its global niche.


Stellantis N.V. ($STLA)

Source: tradingview.com

Summary:

  • Share price at the time of writing: $14.38
  • Stellantis is the world’s 4th largest car maker, operating primarily in the US and Europe. 
  • $STLA was formed in Jan. 2021 by a merger between Fiat Chrysler and the French PSA Group. Stellantis owns 16 auto brands.
  • Stellantis is targeting market leadership in the Low Emission Vehicle (LEV) market.
  • $STLA is showing strong growth rates with margins above the sector average and very attractive valuation ratios.

What they do:

Stellantis is a manufacturer of motor vehicles. It is currently the world’s 4th-largest carmaker. The Company has manufacturing facilities in 30 countries and sells its products in 130 countries.

Stellantis sells vehicles under 16 brands, including Dodge, Chrysler, Jeep, Ram, Fiat, Citroën, Peugeot, Opel, Alfa Romeo, and Maserati.

The Company was formed in January 2021 by a merger of Fiat Chrysler and French automaker PSA (Peugeot SA) Group. It is headquartered in Amsterdam.

Stellantis is the leading seller of commercial vehicles in the European and South American markets and is South America’s leading car company. The Ram brand has 26.2% of the US full-size pickup market. Stellantis has 20.2% of the European vehicle market, placing it second only to Volkswagen.

Stellantis provides in-house financing services through its dealers in most of the countries it operates in.

Stellantis has made significant investments in developing Electric Vehicle (EV) technology. This includes batteries, electric propulsion systems, and autonomous driving technology. The Company is also developing a line of hydrogen fuel cell vehicles.

Stellantis and LG are investing $4.1 billion in a new battery plant in Windsor, Ontario, part of a plan to increase global production to 5 million EVs annually by 2030.

What we learned from social media patterns:

Stellantis operates in the traditional automobile industry. It’s rapidly developing a focus on low emission vehicles, both electric and hydrogen, but both retail investors and the market at large are still treating it as a traditional vehicle manufacturer. That’s a business that doesn’t generate a great deal of interest online, and the social media numbers reflect that.

This is not a “trending stock”, and it doesn’t fit any of the usual “meme stock” categories. That could change if the Company achieves its ambitious EV and hydrogen fuel cell targets, but as of now, $STLA is a value play, something that Reddit rarely notices.

Notable comments from Reddit:

“STLA not only has higher operative cash flows than both Toyota and Tesla COMBINED but it’s growing operating margins y/y and is one of the highest in the industry. VW and Tesla have massive debt whereas STLA has very little with lots of cash. That’s going to be very important in the next 5-10 years.”

– PathoTurnUp

“Stellantis has a great product line of powerful and sporty vehicles that appeal to middle and suburban America. They take a cost effective approach in using platforms longer than other carmakers. Plus their brands are iconic. The Jeep brand alone is huge and has been desirable since its founding in the US and increasingly overseas.

Thank you for pointing this one out. It seems a better value than Ford after they received the EV pump.”

– rodmcmuffins

Smart Money Signal25 analysts currently cover $STLA, with 20 of them rating the stock “Buy”. The average price target is $25.56; 76.9% above the current stock price.

Why $STLA could be valuable:

Global auto sales are in the midst of a strong recovery from the pandemic-induced collapse in 2020. Forbes predicts that the rebound will be strongest in Europe, the market where $STLA has its strongest presence.

Growth has been constrained by supply chain problems, notably a shortage of critical microchips, but those constraints are easing. New vehicle sales in Europe are expected to rise a remarkable 8% in 2022.

Over the long term sales are expected to grow but at a declining rate, meaning that the most competitive players will have the highest chance of success. Despite the projected low growth in sales, McKinsey estimates that new features and business models will expand the industry’s revenue pool by 30% by 2030.

$STLA has a global presence and a brand portfolio ranging from entry-level to luxury, giving the Company exposure to a diversified range of markets.

R&D spending surged from $2.73 billion in 2020 to $5 billion in 2021, driven primarily by the move toward low-emission vehicles (LEVs). 

LEVs (including electric and hydrogen fuel cell vehicles) are expected to reach 70% of European sales and 40% of US sales by 2030, which would make Stellantis one of the world’s leading makers of environment-friendly vehicles in general and EVs.

Amazon and Stellantis are collaborating to develop ther software for the new Stellantis digital cabin platform, and Amazon will be the first customer for the Ram ProMaster electric delivery van.

Stellantis has partnered with Foxconn to assure a stable supply of vital semiconductors.

Stellantis has an impeccable balance sheet. Cash on hand is $50 billion, more than the Company’s market cap. Even after deducting the $33 billion in debt, there’s a net cash hoard of $6 per share. 

The strong cash position is in marked contrast to industry peers. General Motors is carrying $59.25 in net debt per share, with Ford at $25.75 and Honda at $24.42. That’s a strong positive for Stellantis in the capital-intensive race to develop EVs and other low emissions vehicles.

$STLA has an operating margin of 10.6%, above the industry average of 7.5%. ROE is a solid 32.97%. Stellantis currently trades at only 3.31x trailing earnings and 0.29x sales.

Quarterly revenue growth of 173.9% and earnings growth or 370.2% are distorted by comparison to the pandemic-depressed 2020 figures, but TTM revenues of $149.42 billion are well above 2019 or 2018 levels, indicating a solid revenue growth trend.

$STLA has targeted distribution of 25% to 30% of earnings as dividends, which at the current stock price and expected earnings translates to a very attractive yield of 7% to 8.4%. The Company also intends to buy back up to 5% of outstanding shares.

The high dividend, strong balance sheet, and exceptional valuation metrics place limits on the stock’s downside.

What the risks are:

1️⃣ Automakers face significant supply chain issues. From microchips to nickel, shortages of materials and components have emerged as a drag on automotive production. Stellantis will have to manage supply chain issues more effectively than its competitors.

2️⃣ Merging global enterprises. Stellantis is the result of a merger between two major companies representing 16 brands. These will have to be integrated into a single enterprise with a coherent strategy.

3️⃣Development of EV and Hydrogen Fuel Cell technology. Stellantis is effectively staking its future on leadership in electric and hydrogen fuel cell vehicles. The technology will have to live up to the hype.

Bottom line: $STLA is a largely unknown and overlooked player in a major industry: the brands are known, but the Company is not. The high dividend yield, strong balance sheet, and growth rate minimize the downside, while the move into low emission vehicles offers considerable upside.

Intercontinental Exchange Inc. ($ICE)

Source: tradingview.com

Summary:

  • Share price at the time of writing: $124.53
  • Intercontinental Exchange owns and operates marketplaces for stocks, commodities, foreign exchange, and others. 
  • $ICE owns the New York Stock Exchange and futures marketplaces in the US, Europe, Asia, and the Middle East.
  • The Company also operates a Fixed Income and Data Services division and a Mortgage Technology segment.
  • $ICE has shown strong growth and excellent margins, and the stock is a favorite of analysts and institutional investors.

What they do:

Almost anyone trading stocks, bonds, commodity futures, or any other financial products anywhere in the world has probably used some services of Intercontinental Exchange.

Intercontinental Exchange provides market infrastructure, technology solutions, and data services to financial institutions, government entities, and corporations. Their products serve markets in equities, commodity futures, fixed income products, and US residential mortgages.

Intercontinental Exchange operates in three segments.

The Exchanges segment operates regulated marketplaces for listing, trading, and clearing financial securities and derivatives contracts. It operates 13 exchanges and 6 clearing houses in the US, Europe, Canada, Asia, and the Middle East. The New York Stock Exchange is the largest of these exchanges.

The Exchanges segment produces 54% of $ICE consolidated revenues.

The Fixed Income and Data Services segment provides pricing, reference data, indices, analytics and execution services, along with global credit default swaps, clearing, and data delivery solutions. This segment produces 26% of $ICE consolidated revenues.

The Mortgage Technology segment provides a complete technology platform to resolve inefficiencies in the US mortgage market. This segment produces 20% of $ICE revenue.

Intercontinental Exchange has owned a majority stake in the Mortgage Electronic Registrations System (MERS) since 2016. In 2020 they acquired Ellie Mae Inc, originally named Electronic Mortgage Affiliates, a mortgage technology company. 

These acquisitions were combined with other $ICE services to form and end-to-end mortgage processing solution serving all stakeholders in the mortgage process.

What we learned from social media and institutional investment patterns:

Intercontinental Exchange is hardly a household name, and it operates in a market that most retail investors are barely aware of, though they use it with almost every trade. It’s surprising to see a consistently high level of social media mentions.

But are these really references to Intercontinental Exchange? The answer gives a look at the limitations of social media sentiment counters. Apewisdom.io runs a detailed count on ticker mentions on r/wallstreetbets, and their $ICE analysis page includes this revealing statement:

The association of the ticker with cars, vehicles, and emissions – topics with no connection to the Company – is curious, until we remember that ICE is also a common acronym for Internal Combustion Engine and that threads discussing electric vehicles vs internal combustion vehicles are extremely popular.

Simple takeaway: many, if not most, of the supposed mentions of the “ICE” ticker, are being misread by the social media analytic software. They are talking about cars, not Intercontinental Exchange.

Close to 90% of $ICE shares are held by institutions, and the top institutional holders look like a who’s who of major investment managers.

The list of well-known hedge fund managers with positions in $ICE is equally extensive and unusually varied, ranging from pure value investors like Joel Greenblatt (13,000 shares) to disruptive innovation specialist Cathie Wood (119,000 shares), and including George Soros, Ken Griffin, Jeremy Grantham, and many more.


💸 Smart Money Signal 💸 Major European investment manager AKO Capital has purchased 3.83 million shares of $ICE in the last six quarters, with no sales.

Why $ICE could be valuable:

Intercontinental Exchange is a leader in the move to full digitization of global financial markets. Their products and services cover the entire range of financial markets across the world, from simple transactions like buying a home to the most complex institutional trades.

$ICE has an extremely diverse range of products and services, spanning the entire range of financial products around the world. This cushions the company against downturns in a single sector.

Operators of exchanges and clearing houses generate revenue whether markets are rising or falling. Even if retail trade volume falls, institutional trade volume typically continues in both bull and bear markets.

Trading in energy and commodity contracts and derivatives has surged due to the Russia and Ukraine war and appears set to continue at elevated levels. Average Daily Volume (ADV) of trades grew 9% year-over-year in March 2022 despite a slack stock market, driven by a 15% gain in financial ADV (driven by rising interest rates) and an 8% gain in commodities, propelled by a 20% surge in the cocoa market.

The dominant position that $ICE enjoys in the exchange, fixed income, and data segments provides a wide competitive moat. The only real competitor to the NYSE is the NASDAQ, and the barriers to entry in the segment are extremely high. The mortgage segment seeks to bring equivalent technology to a business that remains largely manual. That provides both stability and growth potential.

$ICE boasts exceptional margins and unusually consistent growth figures.

$ICE has shown 16 consecutive years of EPS growth, sustaining growth through the 2008 recession and the COVID pandemic.

Source: $ICE Investor Presentation

The Company’s valuation ratios are reasonable, with the trailing P/E at 16.33 and price to sales at 7.23. The steady growth rate, exceptional margins, and extremely strong competitive position fully justify those valuations and potentially higher ones.

$ICE pays an annual dividend of $1.52/share, for an annual dividend yield of 1.23%. The payout ratio is an entirely sustainable 18.38%.

$ICE has beaten analyst earnings estimates for three consecutive quarters. 14 analysts now cover the stock, with a consensus “buy” rating and an average price target of $152.69, over 30% above the current level.

What the risks are:

1️⃣  $ICE operates in a highly regulated industry, and the diversity of its services and global market means it must deal with numerous regulatory regimes, some of which may be inconsistent. Any compliance failure could have a significant impact on the business.

2️⃣  $ICE handles huge amounts of highly confidential data on a continuous basis. An incident that compromises user data could result in large liabilities and serious damage to the Company’s public profile.

3️⃣  $ICE is carrying a significant amount of debt. Current cash flow is more than sufficient to service the debt, but any reduction in cash flow could turn that debt into a serious problem.

Bottom line: $ICE is a financially stable, steadily growing company with a dominant position in a major global industry.

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