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Fiat Auto’s Profit Makes It A Rarity

But Investors Warn Next Year Will Be Tougher, As Others Recover.
Don’t Hold Your Breath For That Spinoff Either.

Fiat Auto was the envy of most of its peers after it managed to make a profit in the second quarter. Unfortunately, the roles are likely to be reversed next year.

Fiat Auto managed a small profit of €155 million in the second quarter, boosted in a falling market by government scrapping incentive schemes across Europe, which boosted the sale of cheap cars at the bottom of the market which generate feeble profits.

Only VW is likely to join it in the black for the second quarter, although Ford Europe made some money until it was wiped out by Volvo.

Fiat was praised for its success by investors. They also reckon next year the company will one of the few losing money.

“Fiat’s impressive cost control and operational resilience is hard to fault,” said Credit Suisse analyst Stuart Pearson.

“But Auto profit could fall in 2010. Fiat has been one of the main beneficiaries of E.U. scrapping schemes and Brazilian tax incentives. In Europe alone we estimate that Scrappage will boost Fiat’s 2009 sales by some 300,000. As these schemes expire or fade out in 2010, we think volume overhang is inevitable. This, together with potential price pressure, could mean Fiat is one of a few OEMs to post declining automotive profits in 2010,” Pearson said.

Morgan Stanley analyst Adam Jonas agrees.

2010 uncertain
“Fiat’s 2010 outlook is still very uncertain. Fiat Auto could earn less money in 2010 than 2009, even given an orderly phase-down of incentives,” Jonas said.

After the results announcement, Fiat Group confirmed its target of a 2009 trading profit of more than €1 billion. Fiat CEO Sergio Marchionne said he was still looking at possible alliances. Last month Fiat acquired 20 per cent of Chrysler of the U.S., and earlier lost out in its plan to merge with Opel-Vauxhall. Marchionne has said he wants to be part of a group which makes between 5-1/2 and 6 million vehicles a year, a level of global output which he considers necessary for viability.

Spin-off delayed
Deutsche Bank and Nomura International both joined in the applause for Fiat’s performance.

“Overall, a good set of results,” said Deutsche Bank analyst Gaetan Toulemonde.

Nomura analyst Dorothee Cresswell agreed, but also saw those dark clouds looming over 2010.

“Fiat’s results reflect just how adapt management has become at managing its cost base in the downturn. The second quarter’s results season has only just started, but Fiat may be one of the only European OEMs to report a positive operating profit,” Cresswell said.

“Nonetheless, we also see question marks around the sustainability of today’s solid profitability. In particular we fear the consequences of an end to scrapping incentives in 2010 and the potential expiry of government supported temporary layoff schemes,” she said.

Investors expecting the promised spinoff of Fiat Auto from the Fiat Group are likely to have to wait, according to Credit Suisse’s Pearson.

“Although an auto spinoff is “inevitable”, this looks unlikely until margins and cash flows have recovered to healthier levels, a process likely to take at least 2 years,” Pearson said.

Neil Winton – July 29, 2009

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