FCA Lauded As Future Finance Targets Impress Investors.
Profit Ambition Raised, Debt Problem Tackled .
But Could EPA Charges Derail The Company?
“Even if the scandal is smaller, the stakes for FCA are not, and there is a real risk that this will be the beginning of the end of FCA”
Fiat Chrysler Automobiles (FCA) financial results were cheered by investors who expect even better things in 2017, but the U.S. “dieselgate” investigation might throw a spanner in the works.
One strategic advisory company said FCA’s future is endangered by U.S. government accusations because it hasn’t the resources which VW was able to mobilise. If it tottered, the remains would be picked off by autonomous car technology leaders.
Meanwhile FCA’s net profit rose to €409 million in the 4th quarter from €196 million in the same period of 2015, and the company said 2017 earnings prospects look good while worrisome net debt should be cut almost in half to less than €2.5 billion from €4.6 billion at the end of 2016. CEO Sergio Marchionne has said he will wipe out the debt and have at least €4 billion of net cash by the end of next year.
Morgan Stanley described the fourth quarter results as a “strong beat” and was confident about prospects.
“What will happen to the most truck and SUV-exposed (manufacturer) into the next leg of the Jeep and Minivan product cycle? We have highlighted FCA as one of the most positively positioned auto firms filling a change of political agenda in Washington,” said Morgan Stanley analyst Adam Jonas, who talked about the latest data as being a watershed event lifting the entire company.
The U.S. automotive industry is hoping lower taxes and less onerous fuel consumption targets from the incoming Trump administration will be a big benefit.
“The company reiterated its long standing target to achieve net cash by 2018. Are those 2018 targets actually achievable? We’re a very long way off, but, just maybe?” Jonas said.
Investment researcher Evercore ISI reckoned despite the recent powerful performance by FCA’s stock price, investors might still see gains ahead.
Share price doubled
From the end of September to early January FCA’s share price doubled to just over €10.5. It slumped up to 20 per cent after the U.S. Environmental Protection Agency (EPA) announced an investigation into allegations it fiddled diesel emission rules. By the end of January the stock price had recovered almost all the loss.
Evercore ISI said FCA now expects 2017 EBIT (adjusted earnings after interest and tax) of more than €7 billion, which it said was 10 per cent better than most experts predict, while the target for net debt was 44 per cent better than expectations.
“FCA’s guidance would suggest that the company is set to continue to grow earnings and beat expectations as well as benefit from deleveraging. The same cannot be said of the majority of other (manufacturers),” said Evercore ISI analyst Arndt Ellinghorst.
“Deleveraging” refers to the possibility of the company selling off assets like premium subsidiaries Maserati and Alfa Romeo.
UBS Global Research has what it calls a “neutral” stance on FCA’s shares, although it concedes to having underestimated the positive earnings impact of launches this year of the Jeep Compass, Maserati Levante, Chrysler Pacifica, and Alfa Romeos Giulia and Stelvio. It reckons FCA’s 2018 EBIT and net cash targets are too high.
“Our new 2018 EBIT (target) remains 10-20 per cent below the envisaged target range of €8.7 to €9.8 billion as we factor in a more competitive pricing environment in the U.S. Latest Q4 incentive data point(s) to rising pressure also in the SUV and pickup segments. On our new estimates, FCA remains slightly below net cash break-even in 2018, compared with €4-€5 billion envisaged by (FCA),” said UBS analyst Patrick Hummel.
Investment banks don’t seem overly concerned by the EPA accusations.
Analysts have said the main differences between FCA and VW offences, were that the German violations were pre-meditated from defeat devices. FCA’s transgressions, if proven, were probably accidental. There was also some hope that as the Environmental Protection Agency (EPA) case was brought so close to the end of the old administration’s tenure, it might be terminated by an incoming Trump government.
The EPA accused FCA of using illegal software in 104,000 Jeep Cherokees and Ram pickup trucks, which it said could lead to fines of up to $4.63 billion. In contrast, VW had 600,000 diesel vehicles in the U.S. breaking the rules, and millions worldwide.
“We have done nothing, in our view, that is illegal,” said CEO Sergio Marchionne.
At the time, Reuters Breaking Views columnist Olaf Storbeck said this development could derail Marchionne’s plan to retire at the start of 2019 with FCA in healthy financial shape. Based on VW’s costs of between $20,000 and $32,000 per vehicle, this could cost FCA between $2.1 billion and $3.4 billion.
“That would drive Fiat Chrysler off its current path to prosperity,” Storbeck said.
FCA diesel engines are fitted with SCR, or Selective Catalytic Reduction devices, a more effective way of curbing NOX emissions which many offending VW vehicles didn’t have. The cost of rectification is said to be smaller than costs incurred by Volkswagen.
Boston, Mass., based Lex Research has a much less sanguine take on FCA’s exposure to the EPA, saying it has alarming parallels with VW, and could lead to its demise.
It will then be devoured by wannabe auto makers from the technology world.
“Even if the scandal is smaller, the stakes for FCA are not, and there is a real risk that this will be the beginning of the end of FCA. It’s a much weaker company than VW in every way, from finance to government support to market presence and brand equity. The company is not well-prepared to survive a mild recession or recall, much less a major scandal,” said Lex analyst Mark Bunger.
“If the penalty for FCA expands as VW’s did, it will almost certainly have to break up the company. Part of its remains will become the contract manufacturer of bodies for tech companies’ autonomous programs at Google, Uber, Apple and the slew of others – even Blackberry – who have driving technology but lack manufacturing scale,” Bunger said.