EUR 850.00 For Business Accounts Only

Morningstar | FCA Updated Forecasts and Estimates from 13 Aug 2018

No-moat-rated Fiat Chrysler reported second-quarter earnings per share before special items of EUR 0.62, far below the consensus EPS of EUR 0.84 and off EUR 0.07 versus the same quarter last year. The miss was driven by the delayed launch of the new Ram pickup, an associated spike in launch costs, and China consumers postponing purchases at the end of the second quarter to the first part of the third quarter on tariff reduction, especially affecting Maserati but also Alfa Romeo as well as imported Jeep models. Despite the shortfall this quarter, the company turned net industrial cash positive for the first time. The 4-star-rated shares currently trade at an attractive 42% discount to our EUR 25 fair value estimate.

Management reduced 2018 guidance due to the weak second-quarter results. Revenue guidance, which had been EUR 125 billion, was reduced to EUR 115 billion-118 billion due to Ram, China, and negative currency translation (U.S. dollar/euro, real/euro). Adjusted EBIT guidance, which had been "equal to or more than" EUR 8.7 billion, was lowered to EUR 7.5 billion-8.0 billion, also due to Ram and China. However, owing to lower interest expense on reduced debt and due to a favorable tax rate adjustment, management confirmed adjusted net profit at approximately EUR 5.0 billion. Management also confirmed its five-year plan targets, including revenue of EUR 157 billion and adjusted EBIT of EUR 13 billion-16 billion for a 9%-11% margin in 2022.

Our model forecasts include 2018 revenue of EUR 115.8 billion, toward the low end of management guidance, as well as adjusted EBIT of EUR 7.4 billion, just below management guidance. Key-man risk is significant after the loss of Sergio Marchionne, but our model significantly discounts management's five-year plan while maintaining a EUR 25 fair value estimate. Noteworthy assumptions include peak adjusted EBIT margin of only 7.2% in 2020, midcycle margin of 5.9% in 2022, and peak revenue of just EUR 127 billion in 2020.

Consolidated second-quarter revenue increased 4% to EUR 29.0 billion from EUR 27.9 billion a year ago. Despite currency and launch headwinds during the quarter, it was encouraging to see NAFTA revenue rise 9% on a 17% increase in unit volume due to strong sales of Jeep Wrangler, Jeep Cherokee, Jeep Compass, and sales of the new Ram pickup alongside sales of the previous-generation Ram. While shipments in Europe, the Middle East and Africa were nearly flat year over year, higher Jeep and Alfa Romeo sales drove a richer product mix that resulted in a 5% revenue increase. Latin American unit volume growth was healthy, up 14% compared with 2017 on continued demand recovery from a cycle trough in 2016, but unfavorable currency translation muted year-over-year revenue growth at 5%.

Adjusted EBIT for the group declined 11% to EUR 1.655 billion from EUR 1.867 billion reported in the second quarter of 2017. The largest contributors to the year-over-year decline were Maserati and the Asia-Pacific region, partially offset by adjusted EBIT increases in NAFTA, LatAm, and EMEA. Maserati went from a EUR 152 million profit last year to a EUR 2 million profit due to volume and pricing issues arising from the China tariff restriction. APAC swung from a EUR 44 million profit in 2017 to a EUR 98 million loss, also due to China. APAC region sales include certain imported Jeep models as well as Alfa Romeo and certain Fiat brand models. China joint venture equity income, which includes locally produced Jeep and Fiat brand models and is included in Fiat Chrysler's APAC adjusted EBIT, dropped 29% to EUR 75 million compared with EUR 106 million reported last year, primarily due to market weakness in SUV segments.

Even though the NAFTA region posted a 3% increase to an adjusted EBIT of EUR 1.397 billion, margin contracted 40 basis points to 8.0% due to the Ram launch. LatAm region adjusted EBIT was EUR 101 million, up 68% versus the year-ago period, generating a 180-basis-point margin expansion to 4.8%. Operating leverage on higher volume drove margin expansion but was partially offset by a trucking strike, higher advertising for new models, and currency translation. Even though consolidated profitability disappointed during the quarter, we were encouraged to see that the company generated a significant amount of cash. Fiat Chrysler had a net industrial debt position of EUR 1.313 billion at the end of March and a EUR 456 million net industrial cash position at the end of June, owing to a solid EUR 1.5 billion industrial free cash flow performance during the second quarter.

Our EUR 25 fair value estimate includes revenue and margin assumptions that reflect our belief that higher premium brand volume and cost reduction on greater common platform use improves operating leverage. We assume that Magneti Marelli, the components group, is spun off to shareholders at the end of 2018. Despite losing an estimated EUR 6.9 billion in revenue from the spin-off, we estimate average annual revenue growth of 2.2% during our 5-year Stage I forecast as Maserati, Alfa Romeo, Jeep, and Ram brand volumes become a larger part of the product mix. The increase in revenue is driven by our estimate of 3.5% unit volume annual growth. An estimated 1.6% annual increase in average pricing is offset by negative estimated currency translation in the U.S. dollar and real to the euro.

Our adjusted EBIT margin assumptions peak at 7.2% in 2020, the midpoint of our five-year forecast. Fiat Chrysler's five-year business plan includes an adjusted EBIT margin of 7.5%-8.5% in the same year, with a peak range of 9.0%-11.0% in 2022. Our forecast terminates in 2022 with a normalized sustainable midcycle adjusted EBIT margin assumption of 5.9%, representing a 150-basis-point expansion over the 10-year historical median of 4.4%. Our midcycle assumption reflects an improved break-even point from progress on manufacturing efficiencies and an enhanced product mix from premium brand growth.