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Investors Look Again At Fiat Chrysler And See Possibilities

Morgan Stanley Reckons U.S. Recovery Will Boost Chrysler
But Lack Of New Chrysler Product Could Inhibit Progress
Will Management Concentration In U.S. Hamper Fiat?

Many investors thought Fiat’s decision to take a 20 per cent stake in ailing Chrysler made no sense, but with U.S. sales expected to recover faster than Europe’s, some are starting to change their minds.

Morgan Stanley auto analyst Adam Jonas, initially a sceptic, believes the conventional wisdom is now wrong about Chrysler.

“Fiat is one of the only companies in the sector that has taken advantage of distressed valuations and unprecedented political conditions to considerably expand its business scope and strategic alternatives,” Jonas said.

Fiat paid nothing for its 20 per cent stake in Chrysler, but in return promised to share its small car technology. This stake can ratchet up to 35 per cent as more technology is transferred, and might eventually reach over 50 per cent. The U.S. government bailed out bankrupt Chrysler and set up a new company majority owned by the UAW health care trust, 20 per cent by Fiat, and with the U.S. and Canadian governments controlling the rest.

But Commerzbank analyst Daniel Schwarz says even if the U.S. market does recover quicker than Europe, Chrysler’s products are still not up to scratch, while the huge amount of Fiat management time being diverted to the American company will jeopardise Fiat’s performance.

Management concerns
“We see a risk that Chrysler may not benefit from a U.S. recovery given the structural weakness of its product portfolio – as demonstrated by the below-average tailwind from the Cash for Clunkers scheme. We also have concerns regarding the over-allocation of Fiat management capacities to Chrysler,” Schwarz said.

Schwarz noted that Fiat CEO Sergio Marchionne had said Chrysler’s condition was more dire than he had anticipated.

A few days later the Fiat leader said Chrysler could make a profit (before interest and taxes) in two years.

Morgan Stanley’s Jonas said investors have ignored Chrysler’s potential, and the possibility of a successful spin-off for Fiat Auto from the Fiat group. Jonas said there are important facts about Chrysler which markets are wrong about.

·      How much is Chrysler worth? – The market says next to nothing. Morgan Stanley says $6 billion, assuming, among other things, Chrysler eventually earns a 3.5 per cent margin.

·      Chrysler-Fiat synergies? – Market says not many. Morgan Stanley sees cost savings of about 3 per cent on the combined auto revenues of €60 billion.

·      U.S. market recovery? – Market says 12 million in 2010, 13 million in 2011. Morgan Stanley says 12.9 million in 2010, 14.6 million in 2011.

·      Chrysler distracts Fiat management? – Market says yes, and risks Fiat future. Morgan Stanley this is worth it, and will add to Fiat’s long term prospects.

·      Chrysler faces big obstacles – Market says insurmountable. Morgan Stanley says with Chrysler break-even now down to around 11 million annual U.S. sales, profits are possible.

Meanwhile, news about product plans were leaking out ahead of

Chrysler’s scheduled five-year plan expected to be announced on November 4. Fiat aims to integrate Chrysler more closely with its Lancia subsidiary, reports said, with the replacement for the Lancia Thesis being derived from the next Chrysler 300. The Chrysler Sebring’s successor might be used by Lancia, while the little Lancia Ypsilon might go to America. Other reports suggested Chrysler’s first new U.S. model might be brought forward to 2011, while a new Ram brand might be introduced for Chrysler pickup trucks.

Sell!
Commerzbank’s Schwarz remained in the sceptic’s ranks.

“Fiat group remains highly vulnerable. Almost 70 per cent of Fiat’s operating profit in 2008 was attributable to CNH and Iveco. We remain cautious, in particular for the European truck market. Fiat Auto is highly dependent on the Italian (estimated 70 per cent of automotive EBIT) and Brazilian car markets, which we expect to be among the weakest in 2010,” Schwarz said.

“We reiterate our Sell rating.”


Neil Winton – October 15, 2009

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