Chrysler Group LLC, investing in its U.S. factories, lowered its free cash flow forecast for 2014 by two-thirds, a setback for majority owner Fiat SpA (F) as the companies work toward a merger in 2015.
For 2014, Chrysler now sees free cash flow of about $1 billion. In Chief Executive Officer Sergio Marchionne’s original 2009 business plan, Chrysler forecast about $3 billion. Chrysler has been upgrading its manufacturing processes, which adds to initial costs, Richard Hilgert, an analyst for Morningstar Equity Research in Chicago, said in an interview.
“Once everything is up and running and the workforce knows what it’s doing, it means the company will have better cash flow coming from that operation,” Hilgert said today by telephone.
The reduced cash forecast contrasts with Chrysler’s success since 2009, when it emerged from a government-backed rescue. Boosted by demand for Ram trucks and Jeep sport-utility vehicles, Chrysler said today fourth-quarter net income rose 68 percent to $378 million from a year earlier. Full-year profit rose eightfold and may rise 30 percent this year.
Chrysler projected about $80 billion in 2014 revenue, up from a 2009 forecast of $67.5 billion. The higher sales projection with little-changed profit outlook indicates narrower margins.
“They used to think that this could be an up to 8 percent margin business and now they’re talking about 6 percent going forward despite a higher revenue base, none of which would make me particularly bullish on the business,” Erich Hauser, an analyst with Credit Suisse in London, said in an e-mail.
While Chrysler plans six more model revamps this year than forecast in 2009, it’s also dropping four all-new models slated for the Dodge and Chrysler brands. For 2014, it added three new models and six refreshes.
Revenue for the fourth quarter increased 13 percent to $17.2 billion, the Auburn Hills, Michigan-based automaker said in a statement today. Adjusted operating profit rose 40 percent to $711 million. Full-year net income rose to $1.67 billion from $183 million.
Chrysler in October confirmed its forecast for 2012 profit of $1.5 billion on revenue of about $65 billion.
Fiat fell 4.8 percent, the biggest drop since Nov. 20, to 4.46 euros at the close in Milan. That pared the stock’s gain this year to 18 percent, valuing the Turin, Italy-based manufacturer at 5.57 billion euros ($7.56 billion).
Counting on Chrysler
Fiat shares fell when Chrysler released its cash flow forecast, then rose when the Italian company reported a trading profit, or earnings before interest, taxes and one-time items, of 987 million euros. That beat the 941-million-euro average of four analyst estimates compiled by Bloomberg. Fiat also decided not to pay a 2012 dividend to preserve cash.
Marchionne, also CEO of Fiat, is relying on profits from Chrysler to overcome losses at the Italian company’s mass-market brands in Europe, where automakers are coping with the worst sales slump in 19 years. Marchionne has said he plans to merge the two companies by 2015.
“The goals we’ve set for the year ahead reflect a common desire by everyone from leadership to the shop floor to succeed and sustain the power of the house we are building,” Marchionne said in a statement.
Chrysler’s U.S. sales have increased for 33 straight months and its market share has risen three years in a row. Chrysler’s 2012 deliveries rose 21 percent to 1.65 million, which included a 20 percent increase for Ram pickups. The Ram 1500 this month received the North American Truck/Utility of the Year award.
The company’s share of the U.S. market increased to 11.4 percent from 10.7 percent a year earlier, according to researcher Autodata Corp. Last year it gained more market share than any major automaker other than Toyota Motor Corp. (7203) and Honda Motor Co. (7267)
Chrysler forecast 2013 net income of about $2.2 billion, with revenue increasing to $72 billion to $75 billion. The company also projected a modified operating profit of about $3.8 billion. It forecast more than $1 billion in free cash flow for this year. Marchionne said on a conference call with analysts that free cash flow should be “well above” that figure.
Chrysler forecast $4.8 billion in modified operating profit in 2014, specifying what had been a range of $4.7 billion to $5.2 billion. The automaker sees 2.8 million global shipments by then, with most of the growth coming from the Ram truck and Jeep sport-utility vehicle brands.
Net income last year was $1.67 billion on revenue of $65.8 billion. Modified operating profit was $2.9 billion, the company said today.
Fiat rescued Chrysler through a government-brokered alliance in 2009. Marchionne, 60, obtained control of Chrysler without paying any cash by pledging Fiat’s vehicles, technology and managerial expertise. Fiat now owns 58.5 percent of the U.S. automaker.
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