EUR 850.00 For Business Accounts Only

Morningstar | Fiat Chrysler Reports Record Profitability and Market Yawns; Maintaining EUR 25 Fair Value Estimate

No-moat-rated Fiat Chrysler reported third-quarter earnings per share before special items of EUR 0.89, EUR 0.08 better than the consensus EPS of EUR 0.81 and EUR 0.30 higher than the same quarter last year. Consolidated revenue was 9% higher at EUR 28.8 billion compared with EUR 26.4 billion reported a year ago. Record adjusted operating profit was EUR 2.0 billion, up 14% compared with EUR 1.8 billion in the third quarter of 2017. Results were driven by North American operations, which generated an impressive 10.2% adjusted EBIT margin for the quarter. However, WLTP and softening Chinese demand resulted in adjusted EBIT losses in the Europe and Asia-Pacific regions. Despite solid overall outperformance, the market sold the shares down by 2%. The 4-star-rated stock currently trades at an attractive 43% discount to our EUR 25 fair value estimate.

Management confirmed 2018 operating guidance. Revenue guidance remains at EUR 115 billion-EUR 118 billion while adjusted EBIT guidance is EUR 7.5 billion-EUR 8.0 billion. However, owing to production realignment to adjust to softened demand in Europe and China as well as an accelerated discretionary pension contribution, management reduced the 2018 net industrial cash target from EUR 3.0 billion to a range of EUR 1.5 billion to EUR 2.0 billion. Despite the lower outlook for net industrial cash at year-end, management said that the sale of Magneti Marelli would enable a one-time special dividend, at closing, of EUR 2.0 billion, which we estimate at EUR 1.28 per share. Management also confirmed that an annual dividend to shareholders at a 20% payout rate, which we estimate at EUR 0.68 per share, would begin in the spring of 2019.

In our view, the market continues to unfairly discount the shares of Fiat Chrysler. We have maintained significant discounts in our Stage I forecast compared with management's five-year plan announced earlier this year in June. While management forecasts 7% annual revenue growth through 2022, we estimate revenue peaks at about EUR 127 billion in 2020, then declining slightly in 2021 and 2022 to our midcycle assumption of about EUR 124 billion. Five-year plan adjusted EBIT margin reaches a range of 9% to 11% in 2022 versus our estimated 7.2% peak in 2020, then contracting 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 over 70% upside to the current market valuation and a 40% premium to the EUR 18 sell-side consensus price target.