Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Sergio Marchionne probably doesn't bother trying to scare his staff by showing them videos about Elon Musk and electric cars, as rival bosses do at BMW AG.

While BMW and Daimler AG sacrifice short-term profit by investing heavily in electric, autonomous and "connected vehicle" technology, the CEO of Fiat Chrysler Automobiles NV remains unabashedly old-school. He's turbo-charging earnings by racing to sell as many trucks and sports-utility vehicles as he can.

For now, Marchionne seems to be winning. Fiat Chrysler shares have risen 22 percent this year, whereas BMW and Daimler have lost ground. Consumers are snapping up SUVs and ditching sedans. Plus Fiat Chrysler doesn't have a captive finance company in the U.S. to worry about, unlike the Germans.  

Pulling Ahead
Fiat Chrysler shares have outperformed the mighty Germans this year
Source: Bloomberg

It's hard to see Fiat Chrysler's all-in bet on gas guzzlers and its stingy spending on technology as a guarantor of long-term success. For now, though, it's cruising. Earnings comfortably beat expectations this week, despite a production hiatus caused by a switch to making more high-margin Jeeps and fewer low-margin small cars.

So Marchionne’s plan to deliver a huge improvement in profit and cash flow before he retires in 2019 remains on track. Sort of.

His targets (shown in the chart below) still demand a great deal of faith from investors. U.S. auto sales have already started retreating from last year’s peak, meaning competition for each sale is intense.  Fiat Chrysler’s volumes there fell 8 percent in the January to March period.  Analysts expect the company to fall short of its 2018 targets on operating profit and debt. 

A Stretch too Far?
Fiat Chrysler's 2018 targets don't look achievable
Source: Bloomberg
I adjusted the 2018 net debt consensus for roughly 1.8 billion euros of financial services debt

Indeed, with the stock trading on less than 5 times estimated 2018 earnings, Fiat Chrysler's share price is signalling either the company is significantly undervalued or that its turnaround might run out of steam. My hunch is the latter.

Future Proof?
Fiat Chrysler spends comparatively little on R&D
Source: Company reports
includes capitalized development costs

The company is being far too stingy when it comes to tech spending. R&D accounted for 3.8 percent of revenue in 2016, about half that of Volkswagen AG. While the German auto giants clubbed together to buy Nokia's Here mapping business, Fiat Chrysler partnered with Alphabet Inc.'s Waymo unit (the first carmaker to do so). Similarly, its Chrysler Portal electric minivan prototype relies heavily on supplier innovations.

While that keeps development costs down, it creates dependency. The halfhearted commitment to electric vehicles could leave it exposed if regulatory or consumer demands change suddenly. Donald Trump may go easy on fuel economy standards but he might be replaced in 2020. Questions about Fiat Chrysler's diesel emissions aren't resolved yet. Marchionne's attitude about this on Wednesday's analyst call was a bit "let's all move on, shall we?"

Marchionne, though, knows how to flirt with the capital markets. A hint during that analyst call about possibly spinning out the Ram and Jeep brands propelled the shares even higher. Those brands would probably fetch a higher multiple on their own. But for now it's a pipe dream: it's far from clear that the rest of indebted Fiat Chrysler is strong enough to stand alone.

There's no doubt that BMW’s electric paranoia has comic value. But the German carmakers may yet return to their more customary schadenfreude -- at Marchionne’s expense.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It has a partnership with Santander.

  2. Though Marchionne said industry incentives had declined somewhat in April compared to March. 

  3. Though this was partly due to a Jeep model changeover.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net