Fiat Chrysler Refines 2018 Targets, Delays Alfa Romeo Revival.
“We already regarded the old targets as rather ambitious and we continue to have doubts that FCA can improve its performance by such a wide margin”
Nobody seems to believe Fiat Chrysler Automobiles’ (FCA) 2018 targets, the old or the tweaked new ones, and some investors are getting a little uneasy about the future.
FCA reported sharply lower fourth quarter profits, and announced that its exceedingly ambitious targets for 2018 would be stretched out for a bit longer. Alfa Romeo, touted as being an erstwhile BMW or Mercedes, had its ambitions trimmed a bit too.
FCA earnings before interest and taxes (EBIT) fell to €480 million in the fourth quarter from €951 million in the same period of 2014. This was after a one time charge of €834 million to adjust production. For the year, EBIT rose 40 per cent to €5.3 billion.
FCA CEO Sergio Marchionne raised the 2018 revenue target by three per cent to €136 billion, while operating margins would stay between 6.4 per cent and 7.2 per cent. Jeep, with its burgeoning range of SUVs, is given the lead dog role. North American EBIT margins are targeted at nine per cent, up from six to seven per cent. Europe is charged with earning more than four per cent, up from two to three per cent.
Alfa Romeo took the biggest theoretical hit, with its target for 2018 of 400,000 being delayed indefinitely. Last year it sold about 64,000 cars. Alfa Romeo, apparently boosted by a €5 billion investment plan, will still launch eight new models, but by 2020 not 2018. FCA said this was mainly due to sliding sales in China. Meanwhile the launch of the important Giulia midsize saloon has been delayed, although it will still be launched at the Geneva show in March. Production will begin this quarter.
Other new Alfa Romeos, a full sized saloon, two SUVs, two “specialty” vehicles and a hatchback have been delayed to between 2017 and 2020.
There were plenty of critics.
“Ambitious is not really an adequate word to describe it. Fantasyland might be more appropriate,” said Bernstein Research analyst Max Warburton, quoted by Reuters.
Commerzbank analyst Sascha Gommel puts his objection with a little more restraint.
“We already regarded the old targets as rather ambitious and we continue to have doubts that FCA can improve its performance by such a wide margin,” Gommel said, although he did revise profit estimates upwards a bit to reflect 2015’s improved performance.
“We also don’t see the company generating €9 billion to €10 billion free cash flow over three years (Commerzbank estimates €2 billion) considering significant capex needs and as potential drag on working capital should markets worsen.”
“We believe FCA will not reach its targets. In addition, the company continues to have the weakest balance sheet among peers,” Gommel said.
But Barclays Equity Research analyst Kristina Church was impressed, saying FCA will get more benefits from improving the U.S. operation, while European profitability is improving.
Church also liked FCA’s record of creating value for shareholders. But Church didn’t think the 2018 sales target of €136 billion would be reached. It would be more like €118 billion, while the EBIT margin would only get to 6.2 per cent.
Financial not revenue targets
Church liked the fact that FCA had abandoned volume targets and replaced them with financial ones.
Evercore ISI was keeping its powder dry pending an in-depth analysis, although it raised its eyebrows at FCA’s plan to cut net debt by €4 billion to €5 billion by 2018.
“Whilst cynics may claim that the plan is evidence of more back tracking at FCA, in our research we have consistently questioned whether the Alfa Romeo plan was overly ambitious, meanwhile pricing and profit margins on medium sized cars in North America are less attractive than on SUVs and trucks,” Evercore ISI said.