Fiat-Chrysler Profits Hit By Huge Recall Expense.
Investors Reckon Marchionne Charisma Underpins Expensive Stock Price“We continue to see FCA as over-promising, over-leveraged and over-valued”
Fiat Chrysler Automobile’s financial results were hurt by an unexpected charge for possible costs of a recall to fix cyber security problems, yet its shares continue to be highly rated by investors.
That’s all down to faith in CEO Sergio Marchionne, they say.
FCA said it set aside €761 million after the U.S. safety regulator told it to fix 1.4 million vehicles seen as vulnerable to hackers. This helped turn a net profit of €188 million a year ago into a loss of €299 million for the 2015 third quarter. FCA also set aside €142 million because of damage to its vehicles in the Tianjin, China, port explosion, but this will probably be taken care of by insurance, eventually.
Excluding these problems, FCA raised earnings before interest and tax (EBIT) to €1.3 billion from €968 million in the same period of 2014, thanks in part to an improving performance at its Jeep subsidiary.
FCA earlier spun off its Ferrari subsidiary.
According to Bernstein Research analyst Max Warburton, FCA shares continue to be expensive on stock markets despite some worrying problems.
“The reality is that FCA’s margins are thin, its balance sheet over-leveraged and its bottom line earnings minimal. It remains the industry’s most challenged and fragile major (manufacturer). So why do investors continue to pay such a premium for it?” he said.
“The answer is obvious: it’s run by Sergio Marchionne, perhaps one of the most gifted orators in the history of business. He has not only spent the last decade restructuring, reorganising and rethinking Fiat – but he has also spent time mesmerizing his audience. With FCA, investors and analysts are often willing to suspend normal valuation criteria and normal judgement. Margins don’t really matter. Cash flows don’t really matter. What matters is belief,” Warburton said.
Alfa Romeo delay?
He said that despite deteriorating conditions in China and Brazil, and another apparent delay to the Alfa Romeo relaunch, Marchionne still says his 2018 targets are intact. These include a 46 per cent increase on 2015 sales, a doubling of EBIT and quadrupling of net income.
Another doubter is Commerzbank analyst Sascha Gommel, who also points to a high level of net debt, now at €7.85 billion, and confirms his “sell” rating on FCA’s shares.
Fitch Ratings, in a report in which it reaffirmed FCA’s BB rating and stable outlook, said the company has what it called “weak credit metrics”, in particular high leverage and negative free cash flow. It also has major operational challenges and substantial investment needs. But it also has a solid business profile, including a broad product and geographic diversification, robust brands, ambitious strategy and a positive track record as far as the merger and integration of Chrysler in the U.S.
But Bernstein rates FCA shares as “underperform”.
“We do not believe FCA will ever deliver the profitability needed to justify its stock price, never mind get anywhere close to its official targets. We continue to see FCA as over-promising, over-leveraged and over-valued,” Bernstein’s Warburton said.