EUR 850.00 For Business Accounts Only

Morningstar | Fiat Chrysler Faces Key-Man Risk Sooner Than Anticipated; Maintaining EUR 25 FVE

No-moat-rated Fiat Chrysler has announced that the board of directors has accelerated the CEO transition plan and named Mike Manley CEO of the company. Manley was one of three executives that were rumored to be in the running to replace Sergio Marchionne in April next year. The announcement stated that Marchionne had undergone surgery but has suffered complications that have worsened significantly, rendering him unable to return to work.

Key-man risk at the loss of Marchionne's leadership is significant, but his long tenure (Fiat CEO since 2004, acquired Chrysler in 2009) has indelibly changed the organization's culture for the better. However, Fiat Chrysler's press release stated that Manley "will proceed with the implementation of the 2018 – 2022 Business Plan as presented on 1 June this year, a plan that will further assure FCA’s strong and independent future."

We like that Manley has international automotive experience, beginning his career in 1987. He started with DaimlerChrylser in his native U.K. in 2000. His experience has included leading international operations and the product planning group, COO of the Asia-Pacific region, and CEO of the Jeep and Ram brands. Manley also led the effort to establish the joint venture in China that produces Jeeps. With the international expansion of Jeep, Maserati, and Alfa Romeo, Manley's experience should serve the company well.

Given his mandate to implement the 2018-22 business plan to ensure the company's independence, we believe that the planned Magneti Marelli spin-off will occur as scheduled for early next year. Additionally, we see no reason to change our model assumptions, which are already discounted relative to management's plan. We think 4-star-rated Fiat Chrysler stock is attractively valued, currently trading at a 34% discount to our EUR 25 fair value estimate.

Management plans to increase revenue at an average annual rate of 7% and expand adjusted EBIT margins (excludes special items and includes joint-venture equity income) to a range of 9%-11% in 2022 from 6.4% last year. The strategy to achieve these targets includes expanding the Jeep, Maserati, and Alfa Romeo premium brands and expanding the Ram brand while shrinking mass-market brands Chrysler, Dodge, and Fiat.

Excluding Magneti Marelli, which we assume will be spun off to shareholders as of Jan. 1, 2019, we estimate 4% annualized revenue growth during our Stage I five-year forecast. We also assume adjusted EBIT margin expansion of 100 basis points from 6.4% in 2017 to 7.4% at the midpoint of our five-year forecast. Assuming a normalized sustainable midcycle adjusted EBIT margin of 5.9% in year five represents a 150-basis-point increase from Fiat Chrysler's 4.4% 10-year median. This reflects our belief that higher premium brand volume and cost reduction on greater common-platform use results in improved operating leverage.

We think many in the market are underestimating Fiat Chrysler's potential. While our assumptions in the first three years of our forecast are below the low end of management's five-year plan (we taper off into midcycle assumptions in years four and five), our EUR 25 fair value estimate is at the upper end of the sell-side consensus, which ranges from EUR 12.30 to EUR 25 with a EUR 21 mean.