Fiat Boosts Profit Target as Jeeps Fuel Second-Quarter Gain

  • U.S. plants to drop cars to focus on Jeep and Ram vehicles
  • CEO Marchionne confident on reaching 2018 profit targets

Fiat Chrysler Automobiles NV raised its 2016 profit forecast after earnings in the second quarter rose 16 percent on demand for Jeep sport utility vehicles.

The company increased its target for full-year adjusted earnings before interest and taxes by 10 percent to more than 5.5 billion euros ($6.05 billion). The new forecast suggests a slowdown in growth in the second half after the Italian-American manufacturer generated 3 billion euros in adjusted operating profit in the first six months of the year.

The target is conservative, with a big “plus sign” attached to it, Chief Executive Officer Sergio Marchionne said Wednesday on a conference call, adding that targets would be reviewed after the third quarter.

“While guidance upgrades are clearly positive, it is worth noting that consensus is already factoring in estimates higher than the new guidance,” Kristina Church, a London-based analyst at Barclays, said in a report. “We expect quality of U.S. sales to decline over the next 18 months on the back of higher incentives across the industry.”

Fiat Chrysler, which generates the lion’s share of its profit in North America, is bracing for slowing growth in the U.S. after years of expansion by shifting focus to higher margin pickups and SUVs and away from small cars. In response to an investigation by U.S. authorities, the company said it will revise the way it reports figures in the country beginning this month. Under the new method, Fiat Chrysler’s streak of monthly U.S. sales gains would have ended in September 2013 rather than continuing through June.

Fiat Chrysler’s shares fell 2.3 percent to 6.185 euros as of 4:35 p.m. in Milan. The stock has tumbled 27 percent this year, valuing the company at 8 billion euros.

U.S. Retool

In the second quarter, earnings before interest and taxes fell 14 percent to 1.06 billion euros because of 414 million euros in charges for recalling cars with defective Takata Corp. air bags. Excluding one-time items, adjusted operating profit rose 14 percent to 1.63 billion euros. Deliveries in the period slipped 1.3 percent to 1.18 million vehicles amid weaker demand for small and mid-sized sedans, the company said Wednesday in a statement.

Fiat, which is investing $1.48 billion to retool a Michigan assembly plant to make the Ram 1500 full-sized pickup, will produce just Jeep and Ram models in the U.S., ending assembly of smaller passenger cars in the country. Adjusted operating profit at Fiat’s North American business rose 4 percent to 1.37 billion euros, equivalent to 84 percent of the group’s earnings.

Fiat’s European division more than doubled profit to 143 million euros, as industrywide demand recovers from a two-decade low hit in 2013. Analysts have downgraded growth forecasts for the reason through the rest of the year amid concerns about the fallout from the U.K.’s decision to exit the European Union. Fiat downplayed the impact, with Marchionne saying he doesn’t see Brexit as a major risk for the carmaker, which is stronger in southern Europe.

Intruder Alert

Despite economic and political uncertainties, Marchionne said he’s now even more confident in reaching the carmaker’s aggressive 2018 targets, which call for increasing adjusted Ebit to as much 9.8 billion euros and transforming about 5 billion euros of debt into a positive cash position of at least 4 billion euros.

Fiat, the first major carmaker to strike a deal with Google on driverless vehicles, is in discussions with other tech companies, Marchionne said. Fiat has held talks with Uber Technologies Inc. and Amazon Inc., people familiar with the matter said in June.

“The Google experience hopefully will not be the last with a so-called intruder,” said Marchionne, a self-described “Apple freak.”

Before it's here, it's on the Bloomberg Terminal.