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An Alliance Might Fix Fiat Chrysler’s European Problem

An Alliance Might Fix Fiat Chrysler’s European Problem.

“We also wonder how long FCA can keep reviving brands like Maserati and Alfa Romeo”

Fiat Chrysler Automobiles (FCA) financial performance is being dragged down by its European division and investors believe an alliance with another manufacturer could be on the cards.

Ford of Europe recently announced a collaboration agreement with Volkswagen to try and fix its chronic unprofitability. A couple of years ago General Motors sold its loss-making Opel-Vauxhall subsidiary to PSA Group of France.

FCA announced Thursday that net income jumped 61% in the 4th quarter to $1.47 billion, compared with the same period of 2017. Net income for the year rose 3% to $4.1 billion, as sales gained 4% to $131 billion. But it lowered its profit target for 2019. In Europe, adjusted earnings fell 45% to $461 million as sales slid 3.4% to 1.32 million vehicles.

The stock market didn’t like the numbers Thursday and FCA shares dived more than 12% to $15.23 in New York.

Reuters Breaking Views column said Europe looks like FCA’s Achilles heel as the economy slips into technical recession. FCA could try slash- and-burn cost cutting, but a partnership would be best.

“Aligning EMEA (European Middle East and Africa) profitability with group levels would add more than 1 billion euros ($1.1 billion) to operating profit. But shutting plants and firing thousands in Italy – where a large portion of FCA’s European plants are concentrated – would not fly well with the anti-austerity government in Rome,” Breaking Views columnist Lisa Jucca said.

“This leaves seeking partnerships to share the cost of platforms as well as new technology, as advocated by former boss Sergio Marchionne, who passed away in July. Ford agreed last month to jointly produce some vans and midsize SUVs with Volkswagen. Renault is currently tied up with its own internal (Nissan post Ghosn) problems. But France-based Peugeot, with which FCA already collaborates, could be a nice fit for a deeper FCA industrial partnership in Europe. (FCA CEO) Manley needs to find a way to make it worth its while,” Jucca said.

Something must be done
Investment researcher Jefferies agreed that something must be done in Europe, while pointing out that FCA’s profit margin in NAFTA (U.S., Canada, Mexico), at 8.7% lagged GM (10.6%) and Ford (9%).

“We continue to expect some form of consolidation or capital sharing in Europe on smaller vehicles (we have previously reviewed potential with Ford, PSA), and CEO Manley mentioned the possibility of scale partnerships in Europe. We also wonder how long FCA can keep reviving brands like Maserati and Alfa Romeo,” Jefferies analyst Philippe Houchois said.

Citi Research, with a Neutral position on the stock, said it struggled to find anything positive in FCA’s financial report and the prospect of improved global profits in the second half of 2019 was simply too far ahead amidst many uncertainties.

Citi analyst Raghav Gupta-Chaudhary also pointed to possible partnership action in Europe, which accounted for 20% of sales but only 6% of profit.

“The company has been clear that it is open to a partnership, although we suspect that a white knight will only come when things get dire and the asset can be picked up at a severe discount. We cannot rule out an alliance, as recently struck between VW and Ford, although it is not obvious which other (manufacturer) this could be struck with,” Gupta-Chaudhary said.

Bernstein research analyst Max Warburton said investors had great confidence in the late Marchionne’s leadership, but he was neutral on FCA’s prospects now.

“Is management actually capable of handling the growing pressures on this complex company? Can they regain control of what Sergio used to call “the industrial machine”? Is the stock now too cheap? We rate FCA MP (market-perform, or neutral),” Warburton said.

But investment bank Morgan Stanley was bullish about FCA’s prospects.

“We reiterate our Over Weight rating and are making FCA our top pick in U.S. Autos. Attractive valuation, product success, and SOTP (sum of the parts) potential remains, now with expectations in a better place,” Morgan Stanley analyst Adam Jonas said.

Jonas refers to FCA’s European business as “still structurally challenged” with little prospect of improvement.

“Even with major cost improvements, we estimate FCA makes little more than a 0% margin in the EU long term,” Jonas said. 


 

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