Fiat Chrysler: Revving Up Its Engines For Your Portfolio

| About: Fiat Chrysler (FCAU)

Summary

FCA has seen tremendous growth in sales and brand appeal since 2011.

Brand perception continuing to improve.

Product line as a whole is becoming more competitive.

51% chance FCA will touch its median PT of $9.12 by December.

Management and reliability problems give FCA room to improve.

By Contributing Analyst Simrit Jhita

The progress Fiat Chrysler Automobiles (NYSE: FCAU) has made since 2011 is staggering. It has transformed from a cheap rental car corporation into an American brand that appeals to a broad range of consumers. With the Hellcat twins, Chrysler 200, and Grand Cherokee, FCA has maintained record-breaking sales growth for the past several years. It will now face new problems in an industry that is in a transitory period, and based on FCA's track record, future product line, and opportunities to grow, FCA will likely continue to outperform the broader automotive sector for the coming years.

FCA's Product Lineup Changes:

In the next couple of years, FCA will replace the entire Chrysler lineup and half of the Dodge lineup just within the United States. FCA is will expand its lineup even further throughout the LATAM countries and share its platforms across its portfolio of brands throughout the world. New engines, platforms, models, transmissions, and safety technology will make FCA more competitive, but the specifications of these changes are still unclear.

As of yet, FCA's lineup changes include: Chrysler Pacifica hybrid, Chrysler 100, Chrysler 200 replacement, Jeep Grand Wagoneer, and a new Challenger/Charger/300 platform for the next generation. These changes will also likely affect FCA on a global-level through rebadged world cars or shared platforms. There will be more diesel and gas engines, Hellcat/SRT trim levels, hybrid models, and hopefully a successful programming update for the 9-speed transmission.

How FCA Will Continue Its Growth:

General Motors and Ford have gone through major changes in their lineups and using are pushing old inventory through heavy discounts. The changes that FCA will make are going to make it more competitive through lease prices and terms. The late timing, relative to GM and Ford, will give it an opportunity to craft its niche in the marketplace, similar to the strategy implemented with the release of the Challenger Hellcat.

FCA is focusing on more fuel efficient drivetrains and performance cars to draw more customers. Within the near-term future, more hybrid and performance platforms will be available throughout its portfolio of brands, starting with the Chrysler Pacifica and Fiat 124. The Chrysler Pacifica will be able to achieve 80 MPGe and a 30 mile electric range, with a similar price to the Chrysler Town and Country it is replacing.

Interior quality and performance are big areas that FCA has improved in the past decade and it is exploiting this trend with luxury trim levels in the Chrysler lineup and Hellcat engines in more cars. Fiat is forming a partnership with Mazda with the Fiat 124.

Not every model will survive the transition FCA is planning. The Dodge Dart, Chrysler 200, and Dodge Durango will likely be dropped within the next two years - unless in the event that sales improve and costs keep dropping, like with the Jeep Compass and Patriot. This is great news for investors, seeing that FCA is managing to focus on improving its bottom dollar while creating more brand appeal to car shoppers.

FCA has room to improve:

Automotive EPA and consumer standards are forcing automakers to continue to improve technology at a rapid pace to stay viable. This has decreased EBITDA margins and increased electrical issues throughout the industry. FCA is no exception to this, with its 9-speed transmission still undergoing constant transmission programming updates, lower R&D spending, and lower fuel economy. According to Consumer Reports, FCA produces cars that score as well as Toyota's products but lag far behind in reliability. FCA's numerous recalls are likely hurting customers' faith in brand.

One area to look out for is R&D in materials. Use of lighter, stronger alloys, synthetic, and exotic materials in cars is becoming more common to keep up with safety standards without affecting vehicle weight, and FCA also lags behind in this, too. This area of research will become imperative when redesigning the next generation of trucks and commercial vehicles to reduce weight and increase towing and payload capacities.

No longer can FCA's brand revolve around its recovery or Detroit origin. It needs to expand in to new markets, domestically and internationally. Both GM and Ford have formed joint ventures with non-automotive companies to increase revenue - GM offering short-term leases to Domino's and partnering with Lyft to offer autonomous vehicles, Ford with Zipcar and eventually its own rideshare program.

Quantitative and Technical Indicators:

- Expected EPS growth of 59.91% over the next 5 years (could be very optimistic)

- Below book value ($12.11 book value)

- Forward P/E of 3.80

- P/FCF of 17.58

- Short ratio of 12.59

As of 4/14/16 close:

- Implied volatility of 52.23% shows a 1sd move approximately between $5.59 and $9.57 by June expiry

- Median analyst price target of $10.02. Probability of touching $9.12 median price target by December expiry is approximately 51% with the current implied volatility skew

Summary:

FCA offers investors a great opportunity to get long in the automotive sector. With FCA in a transitory period where investors are only focusing on the current picture, the short-term presents a great opportunity to get long before it makes any improvements or releases earnings. FCA not only looks good from a qualitative point of view, but also from a technical point of view. There is support around the $7.00 mark, a high short ratio, and relatively high implied volatility on top of this.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FCAU over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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