FCA Shares Stay Strong After 2017 Results, Positive Outlook.
Jeep Reportedly Misses 2017 Sales Target, Jeopardising 2018’s
“FCA: Resistance is futile”, Says Analyst
Fiat Chrysler Automobiles (FCA) shares have powered ahead since the turn of the year as investors expected the company to unload tasty subsidiaries like Jeep.
But retiring CEO Sergio Marchionne’s less than comprehensive denial that he planned any such thing didn’t stop the advance, which resumed after impressive financial results and intriguing prospects for 2018 and beyond.
FCA 4th quarter net profit doubled to $1 billion (€810 million) compared with the same period of 2016, even as sales slipped slightly to $36 billion (€29 billion), driven by a stellar performance in North America where the profit margin rose half a percentage point to 7.9 per cent. For the year, FCA slashed debt almost in half to $2.97 billion (€2.4 billion).In 2017, FCA’s group margin was 6.4 per cent.
FCA’s stock price, which had blasted ahead in 2018 by more than 30 per cent, retained its strength after the results and the Jeep “denial”. Towards the end of January, the share price was holding close to €20.
At the Detroit Car Show, Marchionne said he didn’t plan to sell Jeep because it would be a big contributor to future profits.
Meanwhile Automotive News Europe (ANE) said Jeep sales in 2017 fell to less than 1.4 million and will likely miss its 2 million target for 2018. FCA doesn’t release brand sales, but ANE quoted documents it had seen.
Some analysts have been caught out over the years by dismissing some of Marchionne’s targets as overambitious.
Bernstein Research analyst Max Warburton joined the investors embracing FCA in a research note headed “FCA: Resistance is futile”.
“At times his targets have seemed ridiculously ambitious,” Warburton said.
“Here we are in 2018 and FCA has just beaten 2017 and reiterated 2018 targets. Yes the cycle has been supportive. Yes, there may be some longer-term damage caused by cuts and killing cars. Yes (international accounting rules are) generous. But the man is probably going to hit his numbers. His place in the Automotive Hall of Fame is assured,” Warburton said.
Marchionne said in 2018 it would be in a net cash position by mid-year and hit the target set 4 years ago of earnings before interest and taxes (EBIT) of $10.9 billion (€8.8 billion).
Investment researcher Evercore ISI was impressed too.
“We remain buyers of FCA (target price €21) which we rate Outperform, a name where we continue to see attractive valuation, strong earnings growth and the need for positive earnings revisions by the street,” said Evercore ISI analyst Arndt Ellinghorst.
Ellinghorst conceded that some of the numbers achieved in 2017 might be questionable.
“However we see these matters as irrelevant to the bigger picture. This is a company which is seeing notable and material operational improvements and is the most attractive under our coverage on a FCF (free cash flow yield,” Ellinghorst said.
Not everybody is joining in the celebrations.
Citi Research analyst Michael Tyndall, who rates FCA “neutral”, worries that despite Marchionne’s huge success, the future holds big problems. The expected new 5-year plan in June will have big hurdles.
“Even though Marchionne will leave the company on a far firmer footing than he inherited, the new CEO must navigate what is arguably the greatest level of change the industry has seen at a time when the U.S. market is likely to be flat at best. To our minds not knowing what or who makes the narrative tricky,” Tyndall said.
Tyndall said the upcoming 5-year plan faces big challenges.
“On our forecasts by the end of 2018 FCA will have doubled revenues over eight years, grown EBIT by 150% and improved net debt by over €6 billion ($7.5 billion). It may seem churlish to point out during this period the U.S. market rose from 12.7 million to over 17 million and the U.S. light truck market rose 66 per cent. In the next 5 years FCA faces a flat if not falling U.S. market and in Europe it has to bridge the second largest gap in terms of 2020/21 CO2 targets,” Tyndall said.
Analysts expect some spectacular action from Marchionne during his last year before his retirement. They also pointed to some glaring weaknesses in the FCA Empire, with Europe looking particularly vulnerable.
FCA has already agreed the spinoff of components maker Magneti Marelli this year.
Alfa, Maserati In Play?
Investors still feel premium pretender Alfa Romero and luxury sports car maker Maserati might be up for grabs.
And speculation won’t go away that Marchionne’s long cherished ambition to be taken over by a bigger auto maker like General Motors might be on the cards while rumours linger of a possible linkup with Ford Europe, or perhaps a Chinese company eager to get a foothold in the U.S. via Chrysler and Europe courtesy of Fiat.