Fiat Expects Falling European Sales, Weak Pricing

Fiat Group kicked off the financial reporting season with ominous looking losses in the fourth quarter, and profit expectations for the Auto group in 2010 which depend more on an extension of government subsidies than any vain hope for improved markets.

Fiat Group recorded a net loss of €283 million in 2009’s fourth quarter compared with a net profit of €163 million in the same period of 2008. For the year, net losses hit an unexpectedly high €848 million. Analysts had expected losses of only around €320 million for the year.

Fiat Group – including autos – forecasts net profit of €200 to €300 million this year, but only if the Italian government in particular and other governments in general extend their scrapping incentive schemes.

Credit Suisse analyst Stuart Pearson wasn’t sure whether Fiat CEO Sergio Marchionne’s targets were conservative or realistic.

“Marchionne has delivered a stark view of European demand in 2010; volumes will fall between 12 and 16 per cent, pricing will be under pressure, and cash may be burnt as capital expenditure rises,” Pearson said. Pearson reckoned that Brazil for Fiat Autos, the CNH agriculture subsidiary and Iveco trucks should enable Fiat Group to reach its trading profit goal of €1.5 billion in 2010. Trading profit was €1.1 billion in 2009. (Fiat’s “trading profit” is operating profit excluding exceptional items.)

Difficult without subsidies
The expiry of most European scrapping schemes is going to make life difficult.

“Car makers will replace Scrappage payments with incentives of their own. We have consistently stressed that Scrappage payments are merely a government funded price cut, and that restoring net pricing in the sector will be a huge challenge given the lack of capacity reduction in Europe. Already Renault, Peugeot-Citroen and Ford are extending Scrappage payments or VAT cuts to their customers in key markets,” Pearson said.

Pearson believes Fiat Group Auto (FGA) profits will fall to €237 million in 2010 from €470 million in 2009.

Citigroup Global Markets forecasts a similar fall to €300 million for the auto group, as new models are limited to the new Alfa Romeo Guilietta, the Doblo, and a new 2-cylinder engine. Things may look up in 2001 though.

“A number of major new models should be able to debut in 2011. Here we expect the new (Lancia) Ypsilon, new (Fiat) Panda, two small minivans and a number of Chrysler based products to fill out Lancia product line and the higher end Fiat products,” said Citigroup analyst John Lawson.

The Wall Street Journal’s Heard on the Street column sees trouble ahead though.

Free option won’t help much
“With wafer thin operating margins, it remains reliant on governments maintaining incentives for buyers of new cars in Europe to get it through 2010. It has a free option on a U.S. auto-sector recovery in its 20 per cent stake in Chrysler but it is too early to say how much that will be worth,” said the column’s Matthew Curtin.

Max Warburton of Bernstein Research said that Marchionne’s remarks after the results announcement that 2010 will be a year of “transition and stabilisation” means not much progress will take place this year. Warburton was puzzled by the fact that Fiat Auto revenues were €1.48 billion higher in 2009’s fourth quarter than the same period the previous year, but profits rose only €55 million.

“What’s going on? Why is the incremental profit on the incremental unit so low? We believe it probably is a combination of currency (Polish zloty impacts lowering 500/Panda margins), pricing (weaker across Europe?) and Brazil (pricing fading?),” Warburton said.

The outlook is bleak.

Unsustainable Brazilian profits
“We fear core Fiat Auto margins are near peak due to unsustainable Brazilian profitability and limited scope for growth in Europe and limited product development firepower. We see a sustained turnaround of Chrysler as a low-probability event that, even if it is achieved, will be unlikely to result in substantial value accruing to Fiat,” Warburton said.

Fiat investors with doubts about the future will have to wait until April 21, when Marchionne will reveal his long-term strategy for Fiat and its U.S. partner Chrysler.