Investors, Impressed, Rush To Raise Profit Forecasts
More Money Made Despite Home Market Diving, Subsidies Ending
Fiat continues to defy the odds, raising profits as sales fall in key markets, economic growth runs out of steam, and government subsidies for its core small cars runs out.
Investors were beside themselves.
“Fiat has again proved more adept than imagined at handling business downturns,” said Citigroup Global Markets analyst John Lawson.
“We regard the performance as outstanding. Fiat’s auto activities performed remarkable (sic) in our view, defying the gravity of a falling domestic market and loss in market share in post scrappage Germany/Italy,” said Deutsche Bank analyst Gaetan Toulemonde.
In 2010’s second quarter, Fiat earned €90 million, compared with a €168 million net loss in the same period last year. Trading profit, or earnings before interest, taxes, and one-time gains or losses, more than doubled to €651 million. Investors had been expecting an average of almost €300 million less than that.
Deutsche Bank raised its forecast for trading profit by 64 per cent for 2010 and by 24 per cent for 2011.
Citigroup’s Lawson raised his estimate for 2010 trading profit to €1.8 billion.
“We would expect increasing confidence in its ability to achieve close to the €2.55 billion and €3.4 billion underpinning our high-end 2011 and 2012 forecasts,” Lawson said.
Fiat’s trading profit in 2009 was €1.1 billion.
Fiat plans to spin-off its CNH agricultural and construction machinery division and Iveco trucks on January 1.
Commerzbank analyst Daniel Schwarz said Fiat’s results were all the more remarkable because the company didn’t have much of a presence in China, where most of the momentum for car sales was taking place, and none in the U.S.
Fiat 500 U.S. bound
The latter will change when Fiat increases its stake from the current 20 per cent in Chrysler to perhaps 50 per cent, and starts selling its cars in the U.S. The first Fiats to go on sale in the U.S. for 30 years will appear in December, when the Fiat 500, made in Mexico, makes its debut.
Schwarz said some 35 per cent of Fiat’s sales are generated in Italy, where the car market fell 16 per cent in the second quarter, compared with the same period of 2009. He said Fiat’s product line-up was ageing.
“Faced with an unfavourable mix we rate it even more remarkable that Fiat Auto achieved a 3.4 per cent EBIT margin in Q2 (3.1 per cent in Q2, 2009). The main drivers were purchasing costs savings (€80 million) and a solid contribution by Ferrari and Maserati (€85 million).
Having pointed that out, Schwarz said it is onwards and upwards from here.
“It’s hardly getting worse. The oldest product range and the most unfavourable geographic split among European peers: We believe 2010 should provide a favourable low basis going forward. We expect renewal of the product offering in 2011 and a bottoming out of the Italian market provides growth momentum in 2011 and 2012,” Schwarz said.
Trouble brewing
The Financial Times’ Lex column provided a more cautionary interpretation of Fiat’s results, but not by much.
“He (Fiat CEO Sergio Marchionne) seems to enjoy hectoring rivals about the need for further mergers to reduce excess capacity and increase profitability. Now he has gone one further, managing to make more money while producing fewer cars. Fiat delivered 6.2 per cent fewer cars and light commercial vehicles in the second quarter than a year ago, but posted markedly better financial results,” Lex said.
Lex said the upcoming spin-off will expose how subscale Fiat is globally, and explains Marchionne’s policy of putting Fiat at the forefront of restructuring. Meanwhile Italian unions dig in to stop modernisation and cost cutting.
“Mr Marchionne faces as big a challenge in Turin as he does in Detroit,” Lex said.
Neil Winton – August 1, 2010
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