Fiat Chrysler Headline Profits Look Good, But Debt’s A Threat.
They also reflect a chronically leveraged company with a very unusual balance sheet – loads of cash and loads of debt
The headlines following Fiat Chrysler Automobiles (FCA) first quarter earnings report looked positive, with Bloomberg News saying profit jumped 22 per cent.
But Bernstein Research, in a published report, didn’t like what it saw, describing the numbers as “poor” and saying its debt load continues to wreck earnings.
FCA net income in the quarter was 92 million euros ($103 million), compared with a loss of 173 million ($193 million) in the same period last year. Sales rose 19 per cent to 26.4 billion euros, that’s close to $30 billion. The European business moved into profit, while U.S. demand for Ram pickup trucks and Jeep SUVs helped sales. Losses widened in Latin America.
“Fiat’s Q1 results really do not inspire confidence. They reflect a U.S. business with pricing and profitability issues, a historic over-dependence on Brazil and a marginal European business. They also reflect a chronically leveraged company with a very unusual balance sheet – loads of cash and loads of debt,” Bernstein Research analyst Max Warburton said.
Warburton conceded that during a conference call with analysts, FCA CEO Sergio Marchionne disputed the claim that the U.S. business had pricing and profitability issues.
Chrysler’s profit margin was 3.7 per cent in the quarter.
Warburton was most concerned about FCA’s interest costs on its huge debt, which increased to an annualized 2.4 billion euros ($2.7 billion) in the quarter.
“This is not a robust or sustainable OEM (original equipment manufacturer). Fiat’s thin finances and highly leveraged balance sheet are amongst the weakest in the global auto industry. The company holds together operationally due to an intense management focus and disciplined financial control. But it hardly looks in good shape to withstand a downturn. As we’ve written before, if Chrysler can only make 3-4 per cent margins at the peak, what will it make in the trough,” Warburton said.
FCA’s Marchionne has made it clear in the past that he is keen on merging with another company to achieve the kind of scale necessary to make big profits.
FCA has been linked with many mass car manufacturers over the years including Volkswagen of Germany and France’s Peugeot. He says six million sales a year would be desirable. FCA sold 4.6 million Jeeps, Chryslers, Dodges, Maseratis, Ferraris and Fiats last year. In the first quarter vehicle sales slid two per cent to 1.1 million.
Marchionne has called for a new round of mergers in the global auto industry for it to earn the returns to support the required investment.
At the presentation today Marchionne presented a promised report about his merger ideas, according to Warburton.
“Marchionne states that it is not about ‘putting FCA up for sale’, or ‘a matter of life or death for FCA’, or SM’s (Sergio Marchionne) final big deal’. In reality, of course, it is all of those things. The presentation argues that the industry desperately needs consolidation if it is to stop destroying value. It is both analytical and passionate, as you’d expect from Marchioness. But doesn’t the investment community already know this? Don’t most industry leaders know it too,” Warburton said.