Fiat Chrysler has fuel left in tank for after Ferrari spin-off

A recovering European car market, improving margins and well-received new models could underpin Fiat Chrysler Automobiles shares even after the spin-off of luxury brand Ferrari, when some analysts predict a reversal for the stock.

A recovering European car market, improving margins and well-received new models could underpin Fiat Chrysler Automobiles shares even after the spin-off of luxury brand Ferrari, when some analysts predict a reversal for the stock.

Shares in the world’s seventh-largest carmaker have been rising since the start of last year, fuelled by hopes that a full takeover of U.S. unit Chrysler and a listing of the merged group on Wall Street could deliver a long-promised turnaround.

In particular, they have leapt more than 80 percent since October, when CEO Sergio Marchionne announced plans to spin off Ferrari and give a big chunk of the highly-prized sports car maker’s shares to Fiat Chrysler Automobiles (FCA) investors.

Some analysts think that once Ferrari is spun off early next year, FCA shares will fall back as investors focus again on the company’s huge debts and the challenges to its ambitious turnaround plan, centred on Jeep and the racy Alfa Romeo brand.

However, better-than-expected quarterly results, a positive reception to the first new Alfa Romeo model and a recovering European car market mean any retreat in the shares may be shallow and short-lived.

“I see near-term risk that some investors are owning FCA shares just to access Ferrari and there may be some pull back post spin-out,” said Kristina Church, an analyst at Barclays.

“But if that occurs, I believe there will likely be considerable upside potential in stub FCA,” she added. Barclays has an “overweight” rating on FCA shares and a 16-euro price target on a stock currently trading around 14 euros.

Behind the one-off boosts to FCA shares, there is a budding recovery story: Marchionne has steered Fiat and Chrysler away from the edge of bankruptcy, FCA has returned to profit in Europe and narrowed the margin gap with U.S. rivals, and new launches in popular segments have helped it to win market share.

The market environment in Europe is getting better too, with sales rising again after six years of declines, and the first new Alfa Romeo unveiled in June lifted some analysts’ hopes that Marchionne might finally succeed in his bid to create a global brand to take on German rivals in high-margin premium cars.


However, Marchionne himself said the market should “not fall in love” with FCA’s second-quarter numbers, adding the road to catch up with its bigger U.S. competitors was still steep.

In particular, FCA may have a race against time to strengthen its model line-up and finances before the U.S. car market comes off its peak. More than half of its profits were made in North America last year.

Although FCA has an attractive portfolio, churning out cars from nippy Fiat 500s and rugged Jeeps to luxury Maseratis, investments in new models have only significantly picked up recently and some products promised for the U.S. market have been delayed, sources have said.

“The U.S. market is definitely closer and closer to a peak in volume terms and transaction prices continue to rise,” said George Galliers, an analyst at Evercore ISI. Current margin levels were probably sustainable for another 12 to 18 months, he said, but “if we look to 2017 and 2018, the jury is out”.

While FCA’s market valuation has recently been higher than most of its European peers, Galliers said the stock could justifiably trade at a similar level to other European mass-market players after the Ferrari spin-off, though at a discount to U.S. market leaders Ford and General Motors .

FCA’s enterprise value (debt plus equity) is currently about 3.9 times 2015 core earnings forecasts (EV/EBITDA) compared with 2.6 for Volkswagen and 1.8 for Peugeot, he said. Adjusting for U.S. accounting standards, he said FCA has ratio of 5.5 against 5.8 for Ford and 4.1 for GM.

Another challenge facing FCA is money.

It is the only major carmaker without positive cash flow, according to analysts, and it faces a huge cash outlay for its 48 billion euro ($53 billion) investment plan. It also has net debt of 8 billion euros, more than any of its major rivals.

But proceeds from the Ferrari listing will help, and the group may also be able to raise more from asset sales.

“FCA should sell all of its parts-making operations,” said Richard Hilgert, an analyst at Morningstar, adding all three components businesses could yield up to 4 billion euros.

FCA has already been approached with an offer for one of the units, sources familiar with the matter have told Reuters.

Marchionne said last month there were “no immediate plans” to sell the unit but did not rule out this could change.

Any improvement in its finances would help Marchionne in his attempts to find a partner to help FCA grow and share costs after a rebuff from GM, his preferred ally.

($1 = 0.8967 euros)

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First published on: 15-08-2015 at 14:55 IST