Morningstar | Fiat Chrysler Has Record Results for 2018, but 2019 Guidance Disappoints; Maintaining EUR 25 FVE
No-moat-rated Fiat Chrysler reported full-year 2018 diluted earnings per share before special items from continuing operations of EUR 3, EUR 0.09 better than the consensus EPS of EUR 2.91 and EUR 0.75 higher than last year. With a pending second-quarter 2019 sale, auto-parts supplier Magneti Marelli was treated as a discontinued operation. Total consolidated EPS, including discontinued operations, was a record EUR 3.20, EUR 0.10 ahead of our estimate of EUR 3.10. Consolidated revenue was 4% higher at EUR 115.4 billion compared with EUR 110.9 billion reported a year ago. Excluding the negative impact of currency translation, revenue would have increased 9%. Record adjusted EBIT was EUR 7.3 billion, up 3% compared with EUR 7.1 billion in 2017.Results were driven by North American operations, which generated an impressive 8.6% adjusted EBIT margin for the full year. However, WLTP and softening Chinese demand resulted in substantial reduction in Europe adjusted EBIT as well as a loss in Asia-Pacific. Despite solid overall outperformance, the market sold the shares down by 11% on disappointing 2019 guidance and concerns over economic contraction in Europe. The 4-star-rated stock currently trades at an attractive 47% discount to our EUR 25 fair value estimate.
Management's 2019 guidance reflects improvement but not to the extent that the market had anticipated. Revenue guidance was not provided, but management expects adjusted EBIT from continuing operations to be greater than the EUR 6.7 billion and 6.1% margin reported for 2018. However, owing to production realignment to adjust to softened demand in Europe and China as well as a EUR 500 million cash payment for fines and other costs from the U.S. diesel emission settlement, management said that 2019 industrial free cash would be greater than EUR 1.5 billion, dramatically lower than the EUR 4.4 billion 2018 industrial free cash flow.
In our view, the market continues to unfairly discount the shares of Fiat Chrysler. We have maintained significant discounts in Stage I forecast compared with management's five-year plan announced in June 2018. While management forecasts 7% annual revenue growth through 2022 to EUR 157 billion, we estimate revenue peaks at EUR 127 billion in 2020, then declines slightly in 2021 and 2022 to our midcycle assumption of EUR 124 billion, including the assumption that Magneti Marelli will be sold in the second quarter this year. Five-year plan adjusted EBIT margin reaches 9% to 11% in 2022 versus our estimated 7.2% peak in 2020, and then contraction to 5.8% in our 2022 midcycle assumption. Despite our discounts relative to guidance, our model still generates a EUR 25 fair value estimate, representing 89% upside to the current market valuation and a 47% premium to the EUR 17 sell-side consensus price target.
Fiat Chrysler Automobiles is a holding company. Through its subsidiaries, Co. is an international automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles, components and production systems. Co. has operations in approx. 40 countries and sells its vehicles directly or through distributors and dealers in more than 140 countries. Co. designs, engineers, manufactures, distributes and sells vehicles for the mass market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation.
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