Winton: Investors like FCA prospects; laud Jeep
Nobody outside of the company seems to think Fiat Chrysler Automobiles (FCA) will get anywhere near making its targets for 2018, but many investors seem to think that won't matter as long as some progress is made.
Investors are also looking closer at the brands in the stable, and like the prospects for Jeep's SUVs, Ram's pickups, and Maserati's exotic sports cars. Alfa Romeo might be a lost cause though. Those looking for FCA to be sold off, or to sell or dispose of any of its brands, won't see action any time soon.
FCA's long-term plan for 2018 was announced last May to much skepticism and the biggest stumbling block was seen as the huge debt burden. Last month FCA said it would seek to partly address that by raising about $4.7 billion including an estimated around $1 billion from a Ferrari deal, a $2.5 billion convertible bond, and the sale of shares.
FCA's long-term plan includes raising vehicle sales more than two million by 2018. The storied but currently moribund Alfa Romeo sporty subsidiary is charged with accounting for 400,000 of the target. Jeep must raise its sales to 1.9 million by 2018 from around 700,000 now. CEO Sergio Marchionne wants earnings before interest and tax (EBIT) to increase from 3.5 billion euros ($4.4 billion) in 2013 to between 8.7 billion ($10.8 billion) and 9.8 billion euros ($12.2 billion) by 2018.
Markets focused on Ferrari, the legendary maker of luxurious and exotic sports cars, usually the first choice for anybody who has just won the lottery, and this was seen in part as a canny way to persuade investors to sign up to the capital raising plan, with little impact on the long-term future of FCA. Ten percent of Ferrari will be sold, and the rest given to FCA shareholders. Since shares in FCA started trading last month, the share price has zoomed 20 percent. Commerzbank analyst Sascha Gommel said then that this initial excitement would soon vanish, and the share price would go into reverse. Early days.
Another skeptic then was Bernstein Research analyst Max Warburton.
"FCA will still be left with seven to eight billion euros ($8.8 billion to $10.1 billion) of net debt, over eight billion euros of pensions and healthcare liabilities and massive negative working capital. This still makes FCA the most leveraged automaker in the world, on our reckoning," he said.
Warburton wondered if the point of the fund raising was to eventually allow Exor, the company which owns about one quarter of FCA on behalf of the Agnelli family, to eventually leave the auto business.
But now that the dust has settled a bit, many analysts are warming to FCA's prospects.
Richard Hilgert, analyst with Morningstar Equity Research in Chicago, agrees that FCA targets will not be met, but says investors are ignoring some powerful arguments which point to the long-term success of the company.
"We think Fiat Chrysler's stock is overly discounted for high debt, management credibility, and not given the value it deserves for underlying assets, not to mention the potential profitability of the newly combined entity," Hilgert said in a recent report.
"While we think this stock should be considered only by those who are willing to accept the risks of a turnaround, highly leveraged company operating in a cyclical, competitive, capital intensive industry, given our 5-star rating, we think investors will be rewarded," Hilgert said.
Hilgert pointed out that both companies survived death-defying moments. Between 2003 and 2004, Fiat looked ready for the undertakers. Chrysler pulled through 2008 and 2009's massive losses, and some investors are currently doubting the combined companies chances of meeting the five year plan objectives.
"While we do not believe the company will achieve — let alone exceed — the lofty objectives set in its five year plan, neither do we believe there is zero probability of success," Hilgert said.
Hilgert pointed to possible recovery in Europe and Brazil over the next five years as likely providing a tailwind, while Jeep, the SUV subsidiary, is likely to do well in China. He felt the targets, although probably unobtainable, would provide a big motivation for employees who are also having to get used to a new combined entity.
Morgan Stanley is another cheer-leader for FCA, saying it has some of the most coveted brands in the auto industry, especially Jeep.
Morgan Stanley analyst Adam Jonas also likes Maserati, the sports car for those who can't stretch to a Ferrari, and Ram's pick-up trucks.
"After Tesla, Jeep stands out in our minds as possibility the best U.S.-domiciled brand to start a global auto firm with," Jonas said.
Jonas expects Jeep to sell a million vehicles this year, and 1.7 million by 2018, just shy of the target. Jonas is less happy with Alfa Romeo's prospects. Giving it away would have a positive impact on FCA's balance sheet.
Surprisingly successful franchise
Despite some negatives, Jonas believes FCA could fall as much as 50 percent short of its 2018 targets and still work as an investment, adding that just below the surface, Marchionne and his team have built a surprisingly successful franchise.
"FCA is run like a small, hungry company with a never-say-die culture more in keeping with Tesla Motors than a General Motors. And this makes a big difference," Jonas said.
Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen doesn't see much hope for FCA long-term in its endeavor to raise its volume to allow it to compete with the leaders like Germany's Volkswagen, GM, Toyota of Japan and Franco-Japanese Renault-Nissan, but does see some short-term gains for Chrysler in the U.S. as it makes big profits from the renewed popularity of big SUVs and pickups. But this is really a lucky break, as gasoline prices unexpectedly dive and its old cars get a new lease of life. The finance required to finance Alfa Romeo's revival is a big ask.
"I don't believe they can turn around all the old products in three to five years to win all the market share necessary to become profitable," Dudenhoeffer said.
To be able to reach the sales levels of the big four leaders would require finding a strong partner, but the only likely candidates are weak ones like Mitsubishi of Japan, and France's struggling Peugeot-Citroen, although Honda might be available, he said.
"By 2018, FCA will still be weak in China, America will be stagnating; that (the U.S.) is going to be a saturated market and with a major brand like Chrysler which has no other market, I don't think FCA will be successful," Dudenhoeffer said.
Milan, Italy-based IHS Automotive analyst Pierluigi Bellini also doesn't think the targets will be hit, but is sanguine about it.
Three or four years late
"The plan used to be described as really very ambitious, and after the refinancing plan added some credibility and now it is just ambitious, because we don't think they are going to make the targets in 2018, but if they get something lower than that, they will be good results," Bellini said.
Bellini said the seven million annual target might be reached three or four years late.
Does the Agnelli family want to exit the auto business?
"It's a difficult question to answer, but the family first of all wants to have a more profitable business first, then it will make the decision," Bellini said.
Morningstar's Hilgert doesn't expect any strategic decisions about selling off all our parts of the company, or acquiring another, for a while yet.
"I think that the potential that FCA may be acquired or that the company may acquire another competitor is low in the near term but could be much higher in three to five years. The debt on the balance sheet acts like a poison pill against a takeover and prevents FCA from doing any acquisitions for at least three years. However, in 2017 and after, the company will have gotten past the bulk of its product and production spending. Cash flow should start to turn positive. Plus, a view to whether or not the company's credit could become investment grade rated will be clear," Hilgert said.
Neil Winton, European columnist for Autos Insider, is based in Sussex, England. E-mail him at email@example.com