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Working Capital, Finance Might Inhibit Fiat If Crisis Worsens

Global Fiat Auto Profit Still Likely in 2012

Investors Should Take Cover When Ferrari-For-Sale Signs Appear

Fiat, like all the mass car manufacturers in Europe except Volkswagen, is fighting an uphill battle for sales, but Citigroup Global Markets has spotted a couple of areas of increasing concern – working capital and finance.

Citigroup Global Markets analyst John Lawson said Fiat’s global auto business is still profitable and that investors are well aware of the close to €5 billion in debt and €6 billion in possible pension liabilities. Lawson said they might be surprised by Fiat’s €8 billion of negative working capital which could increase the danger of cash burn in a slowdown, while financing arrangements for its customers might be another weakness.

“The rest of the European industry appears to have far superior cost of funds (for lending) and strategic control of financing subsidiaries,” Lawson said.

“We continue to estimate a positive (one per cent) for Fiat Auto’s global trading profit for 2012, but anticipate material losses in Europe (four per cent negative margin) as small cars bear the brunt of price erosion,” Lawson said.

Kept afloat
Fiat doesn’t disclose the extent of any European losses, but the company lost about $1.4 billion last year there, according to stockbroker Bernstein Research. This year European losses are said to be a bit less at $1.1 billion. Fiat Europe is effectively kept afloat by profits from its Brazilian operation, which, according to Bernstein analyst Max Warburton, generates about 150 per cent of its annual EBIT (earnings before interest and tax). In Western Europe, Fiat sales, including its Alfa Romeo, Lancia, Chrysler and Jeep brands, fell 11.6 per cent to 724,900 in the first nine months of 2011, according to AID.

Fiat CEO Sergio Marchionne said last month it will breakeven in Europe by 2014.

The economic crisis in Europe could hit Fiat more compared with its German competitors.

“Fiat lacks strategic control of its financing, which could prove a limiting factor relative to German peers with low cost of funds and ability to compensate for potential reluctance of a bank system to extend credit to customers,” Lawson said.

“Sell Ferrari!”
In the past, whenever Fiat has struck a difficult patch, the cry goes up “Sell Ferrari!”, and some analysts think this might raise up to €5 billion. According to Lawson, Fiat plans to hang on to Ferrari, but any change in this policy might signal trouble ahead for the parent company and provide a useful warning light for investors.

“A spin-off of Ferrari does not seem necessary to support any imminent corporate requirement and investors may be tempted to conclude that management sees deeper problems in the core were a sale to be attempted in difficult markets,” Lawson said.

Neil Winton – December 1, 2011

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