Why Chrysler's Q3 Loss Is Good News for the Auto Industry

Includes: F, TM
by: World Market Pulse

Chrysler Group, the U.S. automaker managed by Fiat SpA, one of the two U.S. automakers rescued by the government last year, reported an $84 million third-quarter loss Monday, but executives and analysts believe that the company is moving in the right direction with a projected a $700 million operating profit for 2010 after stripping out financing costs tied to its government-funded bankruptcy. Since its near-collapse and rescue by the U.S. and Canadian governments, Chrysler has owed $7.4 billion to those treasuries, and the interest on those loans has weighed on the company's profitability. It's interesting to note that Chrysler's results come just days after automobile major General Motors (NYSE:GM) finalized terms for its IPO, offering almost $13 billion to repay a controversial taxpayer-funded bailout to reduce the U.S. Treasury to a minority shareholder.

Chrylser Q3: Chrysler's third-quarter results come one year after it unveiled an ambitious 5-year turnaround plan during a conference with analysts, company executives and reporters at its Michigan, headquarters. The automaker reported a net loss of $84 million, compared with a net loss of $172 million in the second quarter. Excluding $308 million in interest on loans and other expenses, the company posted an operating profit of $239 million, its third consecutive profit on that basis.

Revenue rose to $11.02 billion from $10.5 billion in the second quarter. Chrysler now projects an operating profit of USD 700 million for 2010, up from its previous outlook of break-even to as much as USD 200 million. It sees free cash flow of USD 500 million, up from its previous forecast of a shortfall of USD 1 billion. The automaker forecast 2010 revenue of USD 42 billion for the year, at the midpoint of its earlier range of USD 40 billion to USD 45 billion. Earnings before interest, taxes, depreciation and amortization for the year is expected to be USD 3.3 billion, up from its earlier outlook of USD 2.5 billion to USD 2.7 billion. Chrysler’s new Jeep, Grand Cherokee, first of its 2011 models to come out of the gate, boosted the company’s third quarter sales.

Future Projections: Chrysler's market share in the United States has grown in recent quarters, from 8 percent a year ago to 9.6 percent this year, and Sergio Marchionne, Chrysler's chief executive has said that the company is moving toward profitability. Chrysler is launching 16 new and refreshed vehicles, including the 2011 Jeep Grand Cherokee and the Fiat 500, in a bid to seize market share in the United States. The expectations are positive considering the fact that the automaker is planning the manufacture of efficiently fueled cars starting with no less than $3 billion in U.S. Energy Department financing. Also during the quarter, the automaker announced two significant investments in U.S. plants: An $850 million investment has gone into a factory in Sterling Heights, Mich., creating 900 new jobs, and a $600 million investment was made at the plant in Belvidere, Ill.

IPO Talks: The company has said it hopes to go public by the second half of 2011 while its larger rival, General Motors Co is slated to go public later this month.

GM IPO: General Motors finalized terms for its IPO, offering almost $13 billion to repay a controversial taxpayer-funded bailout to reduce the U.S. Treasury stake. GM's filing with U.S. securities regulators marks the final step before it begins marketing what is expected to be one of the largest-ever IPOs. The offering, potentially the largest U.S. IPO since Visa Inc's (NYSE:V) $19.7 billion IPO in 2008, would cut the U.S. Treasury's current 61 percent stake to just over 43 percent. GM's underwriters could sell an additional 54.75 million common shares and 9 million preferred shares if the IPO attracts robust investor demand, raising another roughly $2 billion and potentially taking the total IPO amount to as much as $15.65 billion, the company said in the amended prospectus.

A growing US domestic sales could auger well for GM as the company has already announced that it will stick to its pledge to keep certain levels of vehicle production in the United States until it has fully repaid the US taxpayer.

US Auto Sales: U.S. auto sales rose 13 percent in October, the best month of the year, led by a 19 percent gain at Ford Motor (NYSE:F) while Toyota Motor (NYSE:TM) slipped. Earlier, Auto major Ford's impressive quarter had underlined the company’s strong fundamentals but also presented a case that the automobile sector could very well be back on track as far as domestic sales in the United States is concerned.

Although Investment professionals are also not too favorably inclined to the risk inherent in companies that reorganize after a bankruptcy filing, which wipes out equity investors and often reduces debt obligations to pennies on the dollar, market analysts and automobile industry experts are now waiting to see if the positive results of the US Auto sales gain, along with Ford's positive Quarter in addition to Chrysler's positive 2010 outlook could actually boost interest in the automobile sector - especially with the upcoming initial public offering of General Motors in the pipeline.

Author's Disclosure: No Positions