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Fiat Results Surprise Investors, But Long-Term Looks Cloudy

“Can a car company survive if it spends so little on future product for so long?”

Cut In Profit Forecast Expected.

Fiat’s half year financial results surprised and impressed investment bankers, but they aren’t very confident about the company’s future, even if it manages to win complete control of Chrysler.

And analysts worry that the slashing of spending on research and development on new cars might fatally compromise Fiat’s future.

In the second quarter, Fiat Group increased its trading profit 8.7 per cent to €1.03 billion compared with the same period last year. Fiat managed to cut its losses in Europe to €98 million from €138 million a year ago, despite sales falling almost 10 per cent in the first six months. Fiat plans to return to profit in Europe by 2016.

Fiat Group retained its forecast of increasing trading profit to between €4 billion and €4.5 billion in all of 2013, up from €3.81 billion in 2012. Meanwhile Chrysler warned that its net profit would fall to $1.7 billion in 2013 from a $2.2 billion target, which would have been unchanged on 2012. Fiat currently owns 41.5 per cent of Chrysler and is gradually buying more.

Bernstein Research doubts Fiat’s Brazilian operation can retain its high profitability as the market there deteriorates, and expressed amazement at the performance in Europe.

“Management’s ability to absolutely crush costs (in Europe) is extraordinary –and almost without precedent in the industry. The way Fiat Europe can reduce losses as revenues tumble is quite amazing,” said Bernstein analyst Max Warburton.

“One has to start worrying about its longer-term consequences. Can a car company survive if it spends so little on future product for so long? Just what will Fiat have to sell in 2016? Will Fiat still have the institutional knowledge to design, engineer and build a new car in future years?,” Warburton said.

Citi Research analyst Philip Watkins wasn’t too fazed by the latest results, saying Chrysler’s performance was predictable, Europe was running ahead of expectations, and Latin America uncertain. But he did worry about Fiat’s debt.

“Fiat still has too much debt and if and when it increases its stake in Chrysler this debt will increase further,” Watkins said.

Net debt was €6.71 billion at the end of the first half, compared with €6.5 billion at the end of 2012.

“Unless debt is reduced materially, ultimately it will make Fiat less competitive, we believe, and exposes it to the risks of disruption in capital markets. Even if it did own all of Chrysler, we believe it still wouldn’t have full access to all the cash here under the terms of Chrysler’s lending arrangements,” Watkins said.

Deutsche Bank’s Jochen Gehrke doubted Fiat could achieve its profit forecast for the year and would have to cut it back.

“We continue to believe that the increased sequential momentum in order to achieve such a level will be difficult to reach and expect the group to lower its guidance at a later point in the year,” Gehrke said.

There was some good news though.

Commerzbank analyst Sascha Gommel believes Fiat will reach the lower end of its 2013 target.

In the first half of 2013, Fiat sales in Western Europe dropped 9.8 per cent to 396,700 compared with the same period of 2012. Market share slipped to 6.5 per cent from 6.8 per cent. Fiat has delayed renewing products like the Punto and Bravo and has concentrated on developing bigger versions of the little 500. The latest iterations are the 500L Trekking and MPW.

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