FCA Wins Time In The Sun As Investors Turn Favourable.
Debt Mountain Looks Manageable If Spin-offs Happen.
Maserati, Magneti Mareli, Alfa Romeo, Jeep Raise Hopes.
A combination of hopes that Maserati and Alfa Romeo might lead a renaissance, or at least be sold off to pay huge debts, has transformed the prospects of Fiat Chrysler Automobiles (FCA) for some investors, while dreams of a Trump boom also promises a continuation of fat profits in the U.S.
Investment researcher Evercore ISI, long negative on FCA, has suddenly changed its mind. Morgan Stanley points to the hidden value of the Jeep SUV subsidiary, while Berenberg Bank adds the supplier Magneti Marelli to Maserati and Alfa Rome as potential spin-off candidates.
In a report on FCA headlined “Have We Gone Mad? Upgrade “Sell” to “Buy”, Evercore ISI said CEO Sergio Marchionne is the auto leader most concerned with shareholder value, not least because of his big interest in FCA shares.
“While Marchionne has not always delivered, we believe he genuinely cares more about the equity holder than other CEOs in the business,” said Evercore ISI analyst George Galliers.
Despite regularly reporting improved earnings, investors have long worried about mounting FCA debt, and the expectation that big U.S. profits might come under pressure next year. In 2016’s 3rd quarter FCA 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. At the end of the 3rd quarter though FCA net debt was nearly $7 billion.
After those figures were announced in November, Citi Research noted FCA raised its profit estimate for the year, but also worried about mounting pension liabilities and the debt, and recommended selling the shares.
NAFTA plan favoured
Evercore ISI said FCA’s plans in NAFTA can combat a downturn with its strong mix of SUVs and Pick-up trucks, and is now less exposed to low margin cars. FCA’s small share of leasing is a plus, while the pension deficit will benefit from any rise in U.S. interest rates.
“If post-election infrastructure spend prolongs the auto cycle, FCA will benefit from new products. Any deferral of EPA regulations relieves FCA the most. In Europe, FCA has superior exposure to growth markets and is less exposed to markets showing softer signs, namely Germany and the U.K. FCA is not as at risk from Brexit,” Galliers said.
New products from Jeep and Alfa Romeo will raise pricing and profits. China is less important to FCA than most auto manufacturers.
Morgan Stanley points to the big profits earned by the iconic Jeep Wrangler and Jeep Grand Cherokee, and minivans, and analyst Adam Jonas talks about much hidden value.
“In our opinion, FCA is first and foremost an overlooked sum-of-the-parts story. However, in the meantime, investors may find that the near-term growth, margin and deleveraging story provide some potentially significant upside to the shares,” said Jonas.
FCA is expected to announce its forecast for 2017 late next month, and Jonas said it may provide increased confidence in its near-term earnings outlook, based on the success of recent launches like the Jeep Compass, minivan, and Maserati Levante.
“FCA remains our top pick. FCA is the closest (manufacturer) under our coverage to a pure-play on the U.S. light truck market, has very little China exposure and may be the biggest beneficiary from any potential scale-back of fuel economy standards. Our (€20) target (share price) is based on the unlocking strategic value in our sum of the parts model. In the interim, we expect their 2017 outlook to be potentially very supportive of the near term earnings trajectory. FCA’s margins may be surpassing those of Ford by this time next year. They’ve some as long way,” Jonas said.
Debt-free potential
Berenberg Bank likes the possibility of FCA becoming debt free.
“Further asset divestments/spin-offs – Magneti Mareli, Maserati – have the potential to make FCA debt-free, which would re-rate the equity meaningfully. However, for the bull case to materialise the U.S. cycle needs to be supportive, as solid cash flows from Chrysler offset cash burn from Fiat’s core business in the past,” said Berenberg analyst Alexander Haissl.
Haissl said the Maserati Levante has been earning double-digit profit margins, and the brand could be worth between €3.4 and €4.6 billion, while Magneti Mareli could bring in between €2.2 and €3.5 billion.
Evercore ISI’s Galliers points to some negatives for FCA including ongoing recalls and accusations about emissions compliance, balance sheet leverage and poor handling of the Chrysler 200 launch, and might be vulnerable to any NAFTA negative developments after President Trump takes office.
“However, given our view that the U.S. market is not set to roll over and the positives we list above, we see the risk/reward weighted to the latter,” Galliers said.
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