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FCA Stock Soars As Investors Expect Final Marchionne Action

FCA Stock Soars As Investors Expect Final Marchionne Action.

Will It Sell Jeep, Maserati, Alfa And/Or Magneti Marelli?
Perhaps The Long-Desired Scale Inducing Merger

“the sooner you can announce the new CEO, the better”

As legendary CEO Sergio Marchionne begins his last year at the helm of Fiat Chrysler Automobiles (FCA), investors sense he might leave with some momentous final gesture and the share price has been accelerating ahead.

Since the start of the year, FCA shares have jumped more than 30 per cent, not least because the company is expected to spin off component maker Magneti Marelli, and maybe even the SUV subsidiary Jeep or/and premium pretender Alfa Romero with Maserati thrown in for good measure.

There is also speculation that Marchionne’s long cherished ambition to be taken over by a bigger auto maker might be on the cards – remember his attempt to be consumed by General Motors – while latest rumours concern 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.

Bernstein Research analyst Max Warburton wonders if Marchionne, scheduled to retire in 2019, might in fact hang on in his current job, or take on an Executive Chairman role to oversee his replacement in the day job. Warburton doubts takeover candidates will emerge.

“Four more years! – Marchionne stays at FCA” says a headline in Warburton’s latest report.

“Can he really let go? There’s no real buyer for FCA and no internal successor. We forecast an outsider to replace him as CEO but Marchionne staying on as a very ‘hands on’ Executive Chairman. The market would welcome this,” Warburton said.

Jeep could hit 2 million
Morgan Stanley analyst Adam Jonas predicts FCA’s share price, currently just under €20, can barrel ahead to €30. Jonas is getting excited about Jeep, which he says will reach its sales target of 2 million this year.

“At this level of volume, we estimate that the brand would account for roughly 44 per cent of FCA’s unit sales, 53 per cent of revenue, and nearly 68 per cent of FCA’s global operating profit in 2018,” Jonas said.

“Jeep’s brand and market position in the fastest growing segments represent a tantalizing way for other (manufacturers) to expand or diversify their portfolios,” Jonas said.

Jonas also sees 2018 as a big moment for FCA.

“2018 may actually be the first year where the group’s profitability achieves its full potential setting the stage for potential strategic actions,” he said.

Reuters Breaking Views columnist Lisa Jucca looks at Marchionne’s record at FCA’s helm and compiled a report card. Hugely positive is the result for shareholders, including the biggest Exor, which have seen their investments rise 45 per cent since he took over in 2004. However, Jucca listed some big question marks too, mainly –

  • FCA pre-tax margin may almost double to 5.3 per cent in 2017, but this is less than most competitors. FCA remains too small.
  • China venture with Guangzhou Automobile Industry Group still falls short of required volume.
  • Marchionne fell behind in new technology investment although deciding to buy in connectivity, autonomy and electric may turn out to be a long term gain.
  • Failure to merge: this would have allowed big economies of scale. Currently smaller units replicate research which really only needs to be done once.

Jucca said as for the Marchionne replacement problem, she pointed to strong internal candidates like finance chief Richard Palmer, Jeep chief Michael Manly and Europe’s Alfredo Altavilla.

“But we urge you (FCA) not to dismiss the idea of outside candidates, if only for some of the roles below the CEO level,” Jucca said.

New 5-year plan
“Finally, the sooner you can announce the new CEO, the better. Marchionne is planning to unveil a new five year plan in 2018. That could constrain his successor, who needs to own the plan, not simply inherit it. After all, FCA does not need a Marchionne copycat, but someone who can decisively drive it into the future,” Jucca said.

Morgan Stanley looked at other FCA businesses like Ram, the pickup truck franchise, which had been overlooked by investors. Maserati, will soon add a compact SUV, and might soon be earning €1 billion in EBITDA (earnings before interest, tax, depreciation and amortization) close to Ferrari’s profitability. Alfa Romeo, valued at a big negative, and now at the start of a reorganisation plan, could be packaged with Maserati.

“Inclusion of the Alfa Romeo business with Maserati seems to be a package deal due to the increasingly close engineering and product development relationship. At present, we include Alfa Romeo in our FCA SOTP (sum of the parts) model at a value of negative €2 billion,” Morgan Stanley’s Jonas said.


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