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FCA Improves Profit Again, As Debt Clouds Investor Views

FCA Improves Profit Again, As Debt Clouds Investor Views.

“we believe it is the wrong point in the cycle to own a stock with such a levered balance sheet”

Fiat Chrysler Automobiles (FCA) keeps on reporting improved profits, but investors are worried about the mounting debt, and the fact that its big U.S. earnings will come under pressure next year.

In the third quarter FCA said net income improved to €606 million compared with a net loss in the same period last year of €337 million after a big special charge for recall costs. There was a smaller charge against profit in the latest quarter. Earnings in Europe rose to €104 million from €20 million. Premium subsidiary Maserati made €103 million compared with €12 million year ago, after the launch of the Levante SUV.

Commerzbank analyst Sascha Gommel described the results as mixed with lack lustre free cash flow and said the balance sheet deteriorated further partially due to seasonal working capital swings.

“Q3 results did not provide a reason to turn more positive, in our view. We lower our (profit) estimates for 2017 and 2018 on lower NAFTA (U.S., Canada, Mexico),” Gommel said.

Citi Research said the numbers were better than expected, and noted FCA raised its profit estimate for the year. It also worried about mounting pension liabilities and the debt.

“It might seem we are being churlish, especially as our estimates are going up, but we believe it is the wrong point in the cycle to own a stock with such as leveraged balance sheet. We remain sellers (of the stock),” said Citi Research analyst Michael Tyndall.

Investment researcher Evercore ISI was a bit more positive.

Cycle peak
“To the negative,, there is the leveraged balance sheet at the peak of the cycle, risk around investments in incremental north American capacity, and questions over FCA’s positioning with respect to emissions regulation.”

“To the positive, there is realignment in north America to more profitable segments, resurgence at Maserati, and incremental from Alfa Romeo even if it proves to less material than management hopes. In addition, FCA is slowly deleveraging. The company has also been more open to M&A, offering optionality,” said Evercore ISI’s Arndt Ellinghorst.

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