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Fiat, Ahead Of Spinoff, Cuts Spending, Improves Profit

Fiat’s capital spending is coming in under budget for 2010, but investors are worrying that although this might make the current year’s numbers look good, it doesn’t bode well for the company’s upcoming new cars.

Fiat is likely to spend about 17 per cent less than the original capital spending budget for 2010.

“Fiat’s capex decisions represent a dilemma for investors. On the one hand, high capex investment results in weak cash flow – on the other hand, a low level of investment raises questions about the sustainability of Fiat’s light vehicle market share, especially given that Fiat’s fleet age is among the oldest in Europe,” said J.P. Morgan analyst Ranjit Unnithan.

Fiat is suffering more than most in Europe as sales in its home market dive. Fiat is delaying the launch of its new Panda until January 2012.

“Launching new products in a market that is so structurally weak makes no sense. We are saving our ammunition for a recovery,” Fiat CEO Sergio Marchionne said recently.

Despite losing money in Europe, Fiat reported strong global figures for its third quarter, earning an overall trading profit of €586 million, compared with estimates of €385 million. Fiat raised its trading profit target for 2010 to at least $2 billion from the at least €1.1 billion set in January. But investor’s eyes are now concentrating on the spin-off taking place at the end of the year when the group is split into Fiat Industrial, including Iveco and CNH, and Fiat Auto.

“In their last results outing before the spin-off, CNH and Iveco have made a good case for themselves. Rump Fiat will remain a conglomerate, if an auto-focussed one, which is reflected in our valuation, leaving upside if the Chrysler investment starts to flourish,” said Citigroup Global Markets analyst John Lawson.

Fiat owns 20 per cent of Chrysler, which should rise to 35 per cent as the Italians complete agreed deals on sharing engineering and car designs. Fiat has said this could be completed by the end of 2011. Fiat is expected to eventually raise its stake to 51 per cent, but this is complicated by the fact that Chrysler must first repay its U.S. and Canadian bailout loans.

Neil Winton – November 1, 2010

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