Don’t Miss Fiat’s Bumpy Ride
Detroit may be broke but Chrysler is very much fixed and a lot of the credit belongs to an Italian-Canadian chain smoker with a penchant for plain dress and plainer talking.
Chrysler and Fiat (OTC: FIATY) CEO Sergio Marchionne isn’t going to win any cultural sensitivity awards after complaining about having to pay “shyster” interest rates and waxing lyrical about the merits of a “wop” engine. (He quickly apologized in both instances.)
But maybe he should, because he’s rapidly melding a cobbled corporate clan with deep roots on both sides of the Atlantic into a cohesive whole with a distinct culture and global ambitions. The real prize will be full ownership of Chrysler and a US listing for the combined entity with a valuation more in line with peers. The ride to that destination could have a pothole or two, but this is a racer camouflaged as a clunker, steered by a sweater-addicted accountant who also happens to be an expert driver of corporate turnarounds.
The quarterly results Fiat posted Tuesday showcased the milestones already reached. Revenue rose 4 percent year-over-year despite the drag from a nasty recession in Europe. “Trading profit,” Fiat’s ex-items operating measure, jumped nearly 9 percent, as gains from the still modest but booming Asian sales entirely offset European losses curbed by steady cost cutting. Cash flow accumulated at an annual rate not much below Fiat’s entire market cap, and though much of that was plowed into capital spending the group still managed to cut its debt.
US investors have been rewarded with a 56 percent gain year-to-date on the depositary receipts (ADRs) traded over-the-counter. But shares remain down big since European governments engineered a downturn with austerity measures two years ago. And they’re down 5 percent from the 52-week high hit on the eve of the latest results, because problems remain.
Notably, Fiat warned that annual net profit could now fall up to $500 million from the previously forecast $2.2 billion. That’s partly a function of supply-chain problems that have left Chrysler struggling to meet the strong demand for its Jeeps and delayed crucial launches of new models.
Marchionne was typically blunt in addressing the issue. “We’ve lost volume on a steady basis against our internal objectives…since January,” he said on the conference call. “… You need to remember that in 2010 we produced 1 million cars. We’re now at two-and-a-half times that level.”
In addition to the production glitches, the bottom line’s been weighed down the cost of recalls of vehicle models from the pre-recession era.
And Fiat’s plans to acquire the 41.5 percent of Chrysler it doesn’t already own from the United Auto Workers health care trust have been slowed by a lawsuit over the disputed value of the stake. A Delaware judge this week sided with some of the arguments Fiat has made for a lower price, but still ordered a trial. The decision bolsters Fiat’s case but threatens to drag out the timeline for the merger, essential to Marchionne’s plans to fully integrate the two companies.
This uncertainty and Chrysler’s growing pains have set up an attractive buying opportunity. On the Enterprise Value/Ebitda ratio, Fiat is roughly half as expensive as General Motors (NYSE: GM) and only a quarter of the valuation of Ford (NYSE: F) and Toyota (NYSE: TM).
Industrial surveys suggest Europe’s recession is ending, and any upturn there should feed straight through to the fitter Fiat’s bottom line. Meanwhile, North America has years of growth ahead, Fiat’s Latin American profitability is the envy of every rival and Asia has fallen in love with Jeeps. In Jeep, Ferrari and Maserati Fiat owns three of the industry’s most storied brands, with lots of growth potential as emerging markets grow richer.
And, perhaps more importantly, in Marchionne the company has someone who quickly restored Fiat’s profitability before the financial crisis hit, thereby putting it in position to snag Chrysler when no one else wanted it.
There are plenty of catalysts ahead, starting with the overdue model launches filling big gaps in Chrysler’s lineup this fall, the nascent European recovery, a possible settlement of the Chrysler stake pricing dispute with the union trust and a possible initial public offering of Chrysler shares sometime late this year or in 2014.
What Fiat earns this year isn’t nearly as important to the share price as progress on those fronts. Still, based on the cash the comopany will churn out this year under the worst-case scenario, the stock’s cheap. And Marchionne’s track record suggests he’ll do considerably better.
Chrysler and Fiat (OTC: FIATY) CEO Sergio Marchionne isn’t going to win any cultural sensitivity awards after complaining about having to pay “shyster” interest rates and waxing lyrical about the merits of a “wop” engine. (He quickly apologized in both instances.)
But maybe he should, because he’s rapidly melding a cobbled corporate clan with deep roots on both sides of the Atlantic into a cohesive whole with a distinct culture and global ambitions. The real prize will be full ownership of Chrysler and a US listing for the combined entity with a valuation more in line with peers. The ride to that destination could have a pothole or two, but this is a racer camouflaged as a clunker, steered by a sweater-addicted accountant who also happens to be an expert driver of corporate turnarounds.
The quarterly results Fiat posted Tuesday showcased the milestones already reached. Revenue rose 4 percent year-over-year despite the drag from a nasty recession in Europe. “Trading profit,” Fiat’s ex-items operating measure, jumped nearly 9 percent, as gains from the still modest but booming Asian sales entirely offset European losses curbed by steady cost cutting. Cash flow accumulated at an annual rate not much below Fiat’s entire market cap, and though much of that was plowed into capital spending the group still managed to cut its debt.
US investors have been rewarded with a 56 percent gain year-to-date on the depositary receipts (ADRs) traded over-the-counter. But shares remain down big since European governments engineered a downturn with austerity measures two years ago. And they’re down 5 percent from the 52-week high hit on the eve of the latest results, because problems remain.
Notably, Fiat warned that annual net profit could now fall up to $500 million from the previously forecast $2.2 billion. That’s partly a function of supply-chain problems that have left Chrysler struggling to meet the strong demand for its Jeeps and delayed crucial launches of new models.
Marchionne was typically blunt in addressing the issue. “We’ve lost volume on a steady basis against our internal objectives…since January,” he said on the conference call. “… You need to remember that in 2010 we produced 1 million cars. We’re now at two-and-a-half times that level.”
In addition to the production glitches, the bottom line’s been weighed down the cost of recalls of vehicle models from the pre-recession era.
And Fiat’s plans to acquire the 41.5 percent of Chrysler it doesn’t already own from the United Auto Workers health care trust have been slowed by a lawsuit over the disputed value of the stake. A Delaware judge this week sided with some of the arguments Fiat has made for a lower price, but still ordered a trial. The decision bolsters Fiat’s case but threatens to drag out the timeline for the merger, essential to Marchionne’s plans to fully integrate the two companies.
This uncertainty and Chrysler’s growing pains have set up an attractive buying opportunity. On the Enterprise Value/Ebitda ratio, Fiat is roughly half as expensive as General Motors (NYSE: GM) and only a quarter of the valuation of Ford (NYSE: F) and Toyota (NYSE: TM).
Industrial surveys suggest Europe’s recession is ending, and any upturn there should feed straight through to the fitter Fiat’s bottom line. Meanwhile, North America has years of growth ahead, Fiat’s Latin American profitability is the envy of every rival and Asia has fallen in love with Jeeps. In Jeep, Ferrari and Maserati Fiat owns three of the industry’s most storied brands, with lots of growth potential as emerging markets grow richer.
And, perhaps more importantly, in Marchionne the company has someone who quickly restored Fiat’s profitability before the financial crisis hit, thereby putting it in position to snag Chrysler when no one else wanted it.
There are plenty of catalysts ahead, starting with the overdue model launches filling big gaps in Chrysler’s lineup this fall, the nascent European recovery, a possible settlement of the Chrysler stake pricing dispute with the union trust and a possible initial public offering of Chrysler shares sometime late this year or in 2014.
What Fiat earns this year isn’t nearly as important to the share price as progress on those fronts. Still, based on the cash the comopany will churn out this year under the worst-case scenario, the stock’s cheap. And Marchionne’s track record suggests he’ll do considerably better.