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Fiat’s Results Impress, But Doubts Remain On 2010, Chrysler

Marchionne To Unveil 5-Year Plan For Fiat On November 4
“U.S. patient is suffering from ugly cash-burn”

Fiat’s latest results pleased investors, but they are divided on the likely long-term impact of the relationship with Chrysler.

In the 3rd quarter, Fiat Auto reported a trading profit of €155 million, the same as in the 2nd quarter, and way above analysts expectations of just under €120 million, while the company confirmed its group trading profit target of over €1 billion for 2009 and debt under €5 billion.

It’s too soon to start seeing benefits to Fiat from its link up with Chrysler, according to Commerzbank.

“Even with a leaner cost structure and access to Fiat’s modules and engines we believe that Chrysler would need a 13 to 14 million U.S. light vehicle market to break even or gain massive market share. Looking at Chrysler’s model pipeline in 2010 and 2011 as well as its performance in the cash-for-clunkers programme we regard a positive Chrysler case as highly speculative,” said Commerzbank analyst Daniel Schwarz.

Next year U.S. sales are expected to reach 11.8 million, according to CSM Worldwide, from about 10.1 million in 2009.

According to Morgan Stanley analyst Adam Jonas, a reformed bear on Fiat/Chrysler, the combining of Fiat and Chrysler development might result in some unexpected improvements to long-term profitability from non-cash write-downs of past investments

Credit Suisse expects Chrysler at least to start generating cash in 2010, as it emerges significantly leaner from Chapter XI bankruptcy, but said it lacks product.

“The Fiat-Chrysler alliance in our view is thus more about giving Chrysler the product and technology it requires to restore its top line, than about pure costs savings,” said Credit Suisse analyst Stuart Pearson.

Fiat now has a 20 per cent stake in Chrysler which initially should rise to 35 per cent as the Italians provide an agreed list of engines, technology and product.

“2011 and 2012 is likely to see a wave of new products launched perhaps quicker than the industry and investors expect given Fiat’s now industry leading time-to-market (18 months in many cases). Recall that Fiat’s revival was also borne of the rapid development and launch of the Punto, Bravo and 500 models,” Pearson said.

Fiat’s stake in Chrysler could reach 51 per cent by 2013, which could then be worth $3 billion, according to Pearson.

Not everybody is so positive.

“The challenges faced by Chrysler remain substantial, being a combination of lack of product, market share losses and too much focus on light trucks – we thus value its stake at zero. But in the event of early signs of success, CEO Marchionne could have a valuable chance to finally spin off the entire auto business as a result,” said Deutsche Bank’s Gaetan Toulemonde.

Bernstein Research analyst Max Warburton is also in the negative camp, and is looking for more answers when Marchionne presents his 5-year business plan for Chrysler on November 4.

“Our industry contacts report that Fiat is finding that its U.S. patient is suffering from ugly cash-burn, has very limited product development capability and suppliers are reticent about tooling up for planned new post-2012 products without financial commitments,” Warburton said in a report entitled “So you really can run a car company by Blackberry”.

CEO Marchionne has notched up a massive amount of travel in the Fiat corporate jet as he attempts to bring order to his new global empire, with little time left to run the business by conventional means.

Investors have been worrying that despite Fiat’s stellar performance in 2009 in the face of great odds, it will find it difficult to maintain profits in 2010. They estimate that the European scrapping incentive schemes raised Fiat sales by 300,000, and when they run out a hangover will follow. Brazil has also been providing massive benefits to Fiat, not least because of tax incentives.

“While we remain impressed by Fiat’s resilient 2009 performance, 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 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.

Neil Winton – November 1, 2009

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