Morningstar | FCAU Updated Forecasts and Estimates from 13 May 2019
No-moat-rated Fiat Chrysler reported first-quarter 2019 diluted earnings per share before special items (EPS), including Magneti Marelli discontinued operations, of EUR 0.43, EUR 0.07 below the consensus EPS of EUR 0.50 and EUR 0.23 lower than last year. With the May 2 sale of auto parts supplier Magneti Marelli treated as a discontinued operation, consolidated EPS was EUR 0.36. Global vehicle shipments dropped 14%, but consolidated revenue was only 5% lower at EUR 24.5 billion compared with EUR 25.7 billion in the first quarter of 2018, due to favorable currency effects in NAFTA and APAC regions as well as positive pricing in NAFTA and LATAM regions.Adjusted EBIT margin contracted 160 basis points to 4.4% versus 6.0% last year, on unfavorable operating leverage from significantly reduced global volumes. Adjusted EBIT declined in all regions except LATAM where adjusted EBIT margin expanded 160 basis points to 5.5% from 3.9% a year ago as the company continues to benefit from demand recovery in Brazil. APAC and EMEA regions posted 1.5% and 0.9% adjusted EBIT losses while NAFTA region contracted only 90-basis points to 6.5% on positive pricing and lower launch costs. Maserati performance was disappointing, plunging to 2.4% adjusted EBIT margin from 11.6% in the prior year as the premium brand struggles with high inventories. Despite the first-quarter headwinds, the market bid the shares higher by 5% on management's confirmation of 2019 guidance. Even so, this 4-star rated stock currently trades at an attractive 49% discount to our EUR 28 fair value estimate.
Management's 2019 guidance includes market expectations of a 2% decline in NAFTA, EMEA flat, Brazil up 5%, and China flat, relatively in line with our global demand forecast. The company expects adjusted EBIT from continuing operations to be greater than the EUR 6.7 billion and greater than the 6.1% margin reported for 2018. However, owing to production realignment to adjust to softer global demand 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. Management also confirmed 2019 adjusted diluted earnings per share of greater than EUR 2.70 versus our EUR 2.75 EPS estimate.
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 130 billion in 2021, and then declines slightly in 2022 and 2023 to our midcycle assumption of EUR 124 billion. Five-year plan adjusted EBIT margin reaches a range of 9% to 11% in 2022 versus our estimated 7.0% peak in 2021, and then contraction to 5.7% in our 2023 midcycle assumption. Despite our discounts relative to guidance, our model still generates a EUR 28 fair value estimate, representing 96% upside to the current market valuation and a 76% premium to the EUR 16 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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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