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Chrysler In Profit, But Some Investors Doubt Recovery Power

Merrill Lynch Cuts Chrysler U.S. Market Share Forecast

Chrysler made money for the first time since emerging from bankruptcy in June 2009, prompting comment that its money making qualities might end up bailing out its saviour Fiat.

However, a report from Bank of America Merrill Lynch suggests that Chrysler, far from being in a position to help Fiat, might in fact do the opposite.

Meanwhile in a filing with the U.S. Securities and Exchange Commission, Chrysler said Fiat could raise its stake in the American company to 70 per cent because it has options for 12 months to buy some of the shares owned by the U.S. government, the United Autoworkers Union, and the UAW’s health care trust. This would mean that the expected course of action for Fiat, the acquisition of a 51 per cent stake in Chrysler followed by a public sale of the rest of the shares, might not in fact happen.

In the first quarter Chrysler earned net income of $116 million compared with a net loss of $197 million the previous year. Sales advanced 35 per cent to $13.1 billion.

“Chrysler Group’s improved sales and financial performance in the first quarter show that our rejuvenated product line-up is gaining momentum in the marketplace,” said Fiat CEO Sergio Marchionne.

Analysts pointed out that Chrysler’s first quarter profit was about double that of Fiat’s. While the Italian company has a tough target of about $430 million for 2011, Chrysler’s is $500 million and said to be attainable. If Marchionne’s plans for Chrysler work out, could the U.S. company be a big long-term profit contributor to Fiat?

Less credible
Merrill Lynch is not so sure, pointing out that Marchionne’s plan for Chrysler to gain share looks less credible because its analysis of the product plan for the next four years shows it has one of the lowest replacement rates of any brand in the U.S.

“22 per cent per year, versus Ford and GM both with 29 per cent, leading our U.S. analyst to the conclusion that Chrysler will in fact lose share in the U.S. falling to 9.1 per cent by 2014. If that is right, the downgrade to our numbers is significant; it cuts our unit sales assumption for Chrysler by 20 per cent in 2014,” Merrill Lynch said.

Merrill Lynch said Chrysler’s current U.S. market share is 9.6 per cent and 10 per cent in April.

“For 2014 we currently have 1.7 million units in U.S. sales for Chrysler for an 11.5 per cent share. That is cut to 1.3 million if we adjust that share down to 9.1 per cent,” Merrill Lynch said.

In a report on Fiat, Merrill Lynch gave four reasons why investors would want to sell the shares –

·      Marchionne’s power is fading; any hypothetical upside to a better Ferrari valuation is more than overwhelmed by the downgrade to consensus Chrysler valuation.

·      Brazil – the carnival is over. The most profitable car market in the world for mass-makers, where we believe Fiat made 160 per cent of EBIT last year, is on the slide.

·      High oil prices are a problem for the whole sector, but if there is one auto business in the world that will feel the pain harder than anyone else it is Chrysler, with 84 per cent of sales in light trucks.

·      Look beyond the hype – Fiat is an expensive asset with poor free cash flow generation, geared into a falling Italian market whose arbitrage entry into Chrysler has been all but wiped out by recent moves in U.S. car stocks.


Neil Winton – May 15, 2011

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