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Fiat Profit Target For 2013 Looks Overambitious

Investors Worry About Booming Debt, Chrysler Role

Bottom Line Though Boasts Ferrari, Chrysler, Latin America Business.
Fiat’s prospects continue to divide investors, with some saying its burgeoning debt makes it impossible to compete with free-spending giants like Volkswagen, while others believe the alliance with Chrysler will pay off long-term.

In the first quarter Fiat lost a net €83 million, compared with a profit of €35 million a year earlier. In Europe, Fiat’s trading loss narrowed to €157 million from €207 million in the same period last year. Fiat’s European losses for 2012 improved slightly to €738 million, compared with 2011’s €897 million loss.

Citi Research analyst Harald Hendrikse doubts Fiat’s ability to reach its profit target of €4.0 billion to €4.5 billion for 2013 and doesn’t think Chrysler is the answer to Fiat’s problems.

Bernstein Research analyst Max Warburton believes Fiat has a future, even without help from Chrysler, although he too reckons Fiat will find it hard to reach its profit target.

Fiat owns 58.5 per cent of Chrysler, and is negotiating with the UAW retiree healthcare trust, known as VEBA, which owns the rest. In the first quarter Chrysler reported net profit of $166 million, down from $473 million a year ago.

Commerzbank analyst Sascha Gommel shares Hendrikse’s view that the profit target for 2013 will be missed. Gommel calculates €3.4 billion as a more realistic target.

Hendrikse is worried by Fiat’s debt, which he suggests could hit €8.1 billion at the end of the year. Fiat has already acknowledged that this will have to be addressed with either asset sales or a capital increase in the medium term.

“Fiat’s capital structure remains unsustainable, in our view,” Hendrikse said.

He pointed out that even during boom times in the U.S. market, Chrysler margins fell to 2.8 per cent in the first quarter from 4.5 per cent last year.

“We remain unconvinced that Chrysler EBIT (earnings before interest and tax) and cash flows can save the Fiat Group,” Hendrikse said.

“How will net debt ever come down? With Fiat’s net R&D capitalization accounting for over 30 per cent of group trading profits, we see no positive free cash flow at Fiat in our forecast horizon. With debt at current levels, the company cannot compete in this industry longer term against giants like VW spending €16 billion a year on capex and R&D,” Hendrikse said.

Bernstein’s Warburton’s glass is half full though.

In a report which talked about keeping the faith with Fiat, he said the company had a future even if a deal to buy the rest of Chrysler isn’t forthcoming. Warburton pointed to assets like Ferrari, worth over €4 billion, Chrysler was worth €4 billion too, and its unique South American business was worth a similar amount.

“But clearly, buying out Chrysler and putting cash flow on a more solid footing would be a desirable step,” Warburton said.

End of June decision
The dispute between Fiat and VEBA over the value of the remaining Chrysler stake is expected to be announced by a court by the end of the second quarter.

Warburton said the profit target for 2013 looked difficult. Over the coming months Chrysler would be boosted by the full availability of the refreshed Grand Cherokee followed by the full roll-out of the new Jeep Cherokee in the third quarter.

“(CEO Sergio) Marchionne also suggested the second quarter could see the European car market hit trough levels with volumes recovering thereafter – the rationale for this is unclear, but let’s hope he is correct,” Warburton said.

Neil Winton – May 15, 2013

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