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Fiat Chrysler Meeting Will Reveal Profit, Strategy Targets

Fiat Chrysler Meeting Will Reveal Profit, Strategy Targets.

“And our hunch is there will be a surprise or two on the day to slap the cynics and delight the fan base”

Fiat Chrysler Automobiles (FCA) strategy meeting Friday in Balocco near Turin, Italy, may reveal CEO Sergio Marchionne’s successor before his retirement next year and promises 5-year profit and strategy targets.

Investors will also be looking for answers to questions about the future of Jeep, Alfa-Romeo and Maserati subsidiaries, which have been subject to spinoff rumours.

Investors are getting nervous about the end of the Marchionne era, which has been notable for extravagant claims initially dismissed as impossible, which in the end were more or less met. There have been exceptions. The ambitious plans for a revival of Alfa Romeo still look impossible, although sales have been edging higher lately.

The lack of impact in electric and hybrid cars needs addressing. The Fiat brand’s lineup in Europe looks threadbare with a notable lack of SUVs. 

FCA shares have been edging lower ahead of the meeting, from 19.45 euros on May 22 to just over 18 currently, although they have moved ahead from 16 euros at the beginning of the year.

In the first quarter, FCA reported operating profit up 5% to 1.61 billion euros ($1.9 billion), with positive results in Europe offsetting lower profits in North America. Net debt fell to 1.3 billion euros ($1.5 billion).

A couple of years ago, Marchionne was keen on merging with General Motors but that enthusiasm seems to have petered out. China automaker Great Wall Motors’ interest last year in acquiring the iconic Jeep brand apparently cooled. In the background, Volkswagen is said to covet Jeep because the German company lacks the broad range of big SUVs required in the U.S. market.

Predictable
Bernstein Research analyst Max Warburton said the plan’s content Friday is largely predictable.

“We are certain it will promise huge profit growth, sustainable cash flows and massive dividend growth. We will speculate that it will stoke the hope of corporate action with a new company structure, with brands clustered in groups like VW. And our hunch is there will be a surprise or two on the day to slap the cynics and delight the fan base.” Warburton said.

Warburton hopes that even though Marchionne will relinquish the CEO job, he will remain as Chairman, to provide regular guidance and counsel.

Investment researcher Evercore ISI said FCA investors are concerned about the U.S. market cycle, E.U. emissions regulations and the changing automotive landscape. It expects a net income profit target of between 9 and 10 billion euros ($11.5 billion) for 2022 compared with FCA’s 5 billion euro ($5.8 billion) for 2018. FCA needs to make progress in E.U. CO2 rule compliance, but believes this weakness has been exaggerated.

“Nevertheless, we believe the building blocks are in place for the company to continue to deliver best in class earnings growth in coming years,” Evercore ISI analyst Georges Galliers said.

Successor
The most important decision expected at the June 1 meeting will be the naming of Marchionne’s successor, although Morgan Stanley also  wouldn’t be surprised if he lingered on in some way.

Morgan Stanley said in recent report there is currently no clear Marchionne succession plan and to get the 2022 targets off to a good start it would please investors if he stayed on. Investors would be reassured if big decisions over the future of Jeep and Maserati/Alfa Romeo and their possible spin-offs were to be presided over by Marchionne.

“We see strategic value in many of FCA’s brands that ultimately may require the steady hand of the same leader who, potentially more than anybody, was responsible for putting these brands and businesses in the position they occupy today,” Morgan Stanley analyst Adam Jonas said.

Investment researcher Jefferies said FCA has been a big performer over the last 15 years thanks to Marchionne. It said there will be two big questions facing the meeting Friday.

“Will an independent FCA still exist in 2-3 years, and is making FCA CO2 compliant in Europe by 2021 worth the cost,” Jefferies said in a report.

Bernstein Research’s Warburton pointed out that FCA’s EBIT (earnings before interest and tax) target for 2018 looks hugely ambitious. The target for 2018 is at least 8.7 billion euros ($10 billion) and the first quarter delivered barely 19% of that.


 

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