2 Reasons This Massive Global Auto Turnaround Could Reward Investors

In the grand scheme of businesses near and far, General Motors (NYSE: GM) and Stellantis (NYSE: STLA) have much in common as automakers with a core prowess of producing highly profitable full-sized trucks and SUVs. But despite their many commonalities, the two automakers are wildly apart in terms of momentum and performance.

Over the past three years, GM's stock has more than doubled, and its business is hitting on all cylinders, while Ford Motor Company has at least remained in neutral. On the other hand, Stellantis has faced a long list of problems and has shed over 60% of its value over the past three years.

Of the three automakers, Stellantis may have more near-term upside due to its cheap valuation, and these two reasons could drive its stock higher over the next three years.

1. Ram takes charge

Savvy investors understand that Jeep has long been Stellantis' most important brand, and its continued importance will be crucial to the turnaround's success for investors. However, Stellantis is finally putting up investment dollars to power its Ram ahead of even its Jeep over the next few years. In fact, Stellantis is targeting 2030 sales of 825,000 for Ram in the U.S. market -- that's 60% growth compared to last year -- while Jeep is still strong at 740,000 vehicles.

The driving force behind Ram's growth will be doubling its product lineup during that time, which will expand the brand's reach into multiple new vehicle segments in an attempt to reverse recent momentum that brought Ram to a 12-year low in U.S. sales last year.

"The new products coming in, by and large, won't cannibalize from anything within Ram's current lineup," said Ed Kim, president and chief analyst of AutoPacific, an automotive marketing research firm, according to Automotive News. "These are all-new vehicles that fundamentally are aimed at different types of customers than what the Ram brand currently is reaching."

A rebounding Ram brand is exactly what the doctor ordered for Stellantis. The full-size truck market accounts for about 16% of industry sales volume in the U.S., but generates roughly 40% of the profits, according to Tim Kuniskis, Stellantis' head of American brands.

Ram, along with Jeep, will be expected to help deliver higher margins and average transaction prices (ATPs), which will be crucial to the company rebuilding its profitability. But there's a second big reason to believe this turnaround could have room to run if and when it gains traction.

2. Attacking affordability

As average new-vehicle prices in the U.S. continue to hover around $50,000, there's an opportunity for automakers to deliver compelling vehicles at more affordable prices, which should be a significant boost to sales volume -- even if potentially less lucrative.

A crucial part of Stellantis' turnaround in its North American profit engine will be attacking the affordability problem. That's why it plans to launch nine vehicles priced under $40,000 in the region by 2030, including two priced under $30,000. The potential uptick in sales volume is expected to drive Stellantis' U.S. production capacity utilization to 80% by the end of this decade. Utilization improvement will improve the automaker's production efficiency and reduce the strain of overhead across its products.

Driven by both a resurgence in Ram, as well as a list of new, more affordable products, Stellantis is aiming to grow its North America sales volume by 35% by the end of the decade, grow its top-line revenue by 25%, and return margins in the region to between 8% and 10%.

Time to buy?

Make no mistake: Investing in Stellantis isn't a no-brainer right now. It's making the right soundbites and headlines by finally focusing massive investment in core brands such as Jeep and Ram, as well as a couple of European-focused brands, and unleashing a list of new products to compete in new segments and at some lower price points. It still has much work to do on quality, which has drastically increased its warranty costs, and needs to mend relationships with suppliers and its dealership network.

That said, if Stellantis can produce compelling vehicles at the right price points, it should be a substantial boost to its volume, margins, and production efficiency -- and that should be enough to send its stock higher over the next few years.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and Stellantis. The Motley Fool has a disclosure policy.