How Fiat Chrysler Stock Tripled: 3 New Products, In 3 New Locations, In Q1 2018

Summary

• FCAU stock went from under $6 to more than $22 in less than two years. What caused this re-evaluation of the company’s prospects?
• I argue that it was because FCA ended the production of small/midsize cars in the U.S. in favor of new and refreshed SUVs and pickup trucks.
• Several factories were shut down for retooling, which harmed sales in late 2016 and all of 2017. However, those numbers returned with a vengeance in March 2018.
• I describe the three major 1Q 2018 product launches in detail: Jeep Wrangler, Jeep Cherokee and RAM Pickup Truck 1500.
• Jeep Wrangler grew 70% in March 2018, Jeep Cherokee 63%, and we should see a very strong rest of 2018.  SUVs and pickup trucks are where you find the automotive industry profits.

For all the talk about how Tesla (NASDAQ:TSLA) has been a great stock, FCA (NYSE:FCAU) has done much better in the last two years. It’s gone from under $6 per share to over $22. What’s behind this monster move?

The answer resides in three new products that eventually hit U.S. dealerships in January, February and March 2018, respectively. I’ll tell you more about these products below, but first some background.

It was two years ago when FCA started outlining its plans to not only exit some business lines and enter new ones, but also to repurpose its factories. The plan was basically six-fold:

1. Exit the Dodge Dart and Chrysler 200.

2. Add a new Jeep pickup truck and a new larger Jeep SUV (Wagoneer).

3. In the meantime, come out with a new Jeep Cherokee.

4. Also, come out with an all-new Jeep Wrangler.

5. Also, come out with an all-new RAM 1500 pickup truck.

6. Do all this by repurposing a combination of four factories in and near Michigan.

Let’s first start with FCA’s Belvidere, IL, plant. It had been making the Dodge Dart until October 2016, when it was discontinued. At that point, the plant was reconfigured to produce the Jeep Cherokee instead: here.

During the eight months that followed, this Belvidere, IL, plant was reconfigured to make the Jeep Cherokee. The Cherokee production had previously taken place in Toledo, OH. Production of the Jeep Cherokee in the Belvidere, IL, factory started on June 1, 2017.

Now, as of that production start - June 1, 2017 - it was still the old Jeep Cherokee. Seven months later, in January 2018, production of the meaningfully refreshed Jeep Cherokee took over. More about that new Cherokee model later in the story.

So what happened to the old Cherokee production location in Toledo, OH? It was cleared out to make way for the all-new Jeep Wrangler, whose predecessor had been made next door, also in Toledo, OH: here.

This production of the all-new Jeep Wrangler started at the end of 2017 and cars started arriving in U.S. dealerships around January 2018.

But what about the other half of the factory, where the current/old Jeep Wrangler continues to be made? This production is going to end, perhaps in the second quarter of 2018, in favor of repurposing the factory for a pickup truck version of the all-new Jeep Wrangler. This pickup truck production should start around April 2019.

So far, so good. One product has been ended (Dodge Dart), one has been replaced by an all-new one (Jeep Wrangler), one has been significantly refreshed (Jeep Cherokee) and space has been made available to produce an all-new pickup truck (Jeep) that has no immediate predecessor. I hope you followed this production shell game.

However, it is not the end of the FCA story that led to the stock going from under $6 to over $22 in less than two years. There's one more factory shell dance that needs to be described before we get into the actual vehicles.

FCA didn’t just discontinue the Dodge Dart. It also discontinued the Chrysler 200, in December 2016. It was made in the Sterling Heights, MI, plant: here.

Replacing the Chrysler 200 in this plant is the all-new RAM 1500. It is the pickup truck that started to arrive in U.S. dealerships in March 2018, which was too late to make an impact on FCA’s U.S. March sales numbers: here.

FCA had been making the RAM pickup trucks in two plants: Warren, MI, and in Mexico. In 1Q 2018, it added this new plant - Sterling Heights, MI. Did demand for RAM pickup trucks suddenly increase 50%? No, it did not.

For several more months, perhaps even a year or a little more, FCA will continue to produce RAM pickup trucks in Warren, MI. However, at the end of 2018 or some time in 2019, this production will end, and FCA will be back to square one with two RAM pickup truck factories - Sterling Heights, MI, and Mexico.

That leaves us with one final move on the chess board: What will be built in the Warren, MI, factory? The answer is that some time in late 2019 or 2020, this will be the location of the new Jeep (Grand) Wagoneer. It will be the biggest Jeep for sale in the U.S., and the first three-row one in at least a very long time.

The Jeep (Grand) Wagoneer will compete with the body-on-frame SUVs from General Motors (NYSE:GM) (Tahoe, Suburban, Yukon and Escalade) and Ford (NYSE:F) (Expedition and Navigator). Other main competitors include the Nissan (OTCPK:NSANY) Armada, Infiniti QX80 and Toyota (TM) Sequoia. Supposedly, this new (Grand) Wagoneer starts off its transformation into an SUV as a RAM 1500 pickup truck.

The net of these changes mean FCA ended the Dodge Dart and Chrysler 200 cars in favor of two all-new products with no predecessors - Jeep pickup truck and the large three-row body-on-frame Jeep SUV. Other products were refreshed or replaced with all-new generations.

All that said, back to where this story started: The three new products launched in January, February and March 2018, as those are what will be driving FCA’s U.S. sales increases in 2018, and the collective reason for the build-up in the stock over the last two years. Let’s describe these three new products in turn:

• Jeep Wrangler (January 2018)

The most iconic of U.S. vehicles was born into war 1941. It has been a favorite of custom outfitters and always looked great on the outside. However, it had a spartan interior, a short list of creature comforts, and was generally terrible to drive on-road. I would never have thought of buying one.

However, this all-new Wrangler is a totally new animal. It retains only two vital things from its past: Looks and off-road capabilities. If anything, its historical strengths have been improved, as the all-new Wrangler looks even better, while managing to crawl over rocks even more impressively.

For regular people in everyday driving, however, they will note that the interior has gone from uncomfortable and sparse to comfortable and feature-filled. There's nothing lacking in this interior, including multiple USB-C ports and better smartphone holders than any other car I have seen.

While the square body panels still yield a tiny bit of wind noise at highway speeds, it’s now about as nimble and confident as any other car to drive on the highway - a total reversal of its military vehicle past. The new four-cylinder turbo engine also is a superb addition for $1,000 extra, as it improves on the already good V6 engine. The four-cylinder turbo should be available this summer, and fuel economy numbers are not yet available. But if there is any improvement over the V6, it’s a must-have option in my opinion.

The all-new Wrangler is off to a gigantic start in 2018 with U.S. unit sales up 70% in the month of March and 34% year to date: here. This is the beating heart of Jeep, even though the RAM pickup truck sells more.

• Jeep Cherokee (February 2018)

I was never a big fan of the version of the old Jeep Cherokee that they made through 2017. I just couldn’t get over its (negatively) polarizing exterior design.

With the new Cherokee starting in late February 2018, this changed. While technically a mid-cycle refresh, Jeep made all the right changes - and not just the exterior design, which now fits logically with the smaller Compass and larger Grand Cherokee.

The new Cherokee has been tweaked all-around, and it lost 150 pounds in the process - and got a new optional four-cylinder turbo engine. As with all Jeeps, you pay a penalty for driving something that has such class-leading superior off-road capabilities. The trick is to figure out whether the resulting on-road compromises are worth it.

I spent a half day flogging the new Cherokee around twisty mountain roads, and I found its on-road behavior to be very confidence inspiring. It will never outperform most competitors because of its inherent off-road mission, but while you’re on road, this new Cherokee communicates its limits pleasantly to the driver. In other words, this is a very reasonable on-vs.-off road compromise.

If I had to nitpick, I would point to the flat driver’s seat that puts the driver too high inside the cabin for my taste. It makes the car’s dynamics feel less sporty, and helps you to dial back the speed in the curves. Shorter people may find it more suitable, and I generally recommend textile upholstery as opposed to the more slippery leather.

I had driven the all-new smaller Jeep Compass a few months prior, and it’s a newer platform architecture. Still, I thought that this new Cherokee felt more solid, including the new engine. The new turbo engine is a $500 upcharge from the V6, and well worth it in my opinion.

As with all other Jeeps, the interior cabin’s ease-of-use is second to none. Unlike some more complicated premium cars from Europe and Japan, the Jeep is a breeze to just jump into and get going.

U.S. sales of the Cherokee were up a whopping 63% in March, which speaks to consumers liking all of these improvements a lot. This is a midcycle refresh in which everything went right, including switching production away from Toledo, OH, to Belvidere, IL.

• RAM Pickup Truck 1500 (March 2018)

While the Jeep brand sells twice as many vehicles as the RAM brand in the U.S., FCA’s single best-selling nameplate in the U.S. is the RAM Pickup Truck. It’s twice as large as any other individual FCA nameplate, as it sold 103,964 units in the U.S. in the March 2018 quarter.

The all-new 1500 version of the RAM Pickup Truck started arriving in U.S. dealerships too late to meaningfully impact March 2018 sales, but I had a chance to drive four versions of this truck in March. I was beyond extremely impressed.

The interior of the all-new RAM is simply the best I’ve experienced, period. It’s ergonomically perfect with adjustable pedals, and all controls are crystal clear. The other pickup trucks in the market also have great storage spaces, but the 2019 RAM sets a new even higher bar. You have to see it to believe it.

I particularly fancied the lower-end trim level (“Big Horn”) which has a bench seat in which the middle position folds forward to create a major storage space and arm rest. Combined with simple textile seating surfaces, it makes for the most practical solution.

Unlike many other large trucks, this all-new RAM moved over bumps smoothly despite having no heavy weight in the bed. Steering and handling were equally smooth, indeed flawless.

I can usually nitpick and find some downside in any new vehicle. When it came to the 2019 RAM, I'm drawing a blank. For a full-size pickup truck, this driving experience was almost too good to be true - and that comes from someone who is also a huge fan of the Ford (F) F-150, Chevrolet (GM) Silverado and GMC Sierra.

Interestingly, this all-new RAM will lag Ford and GM in diesel availability. Ford starts selling its new F-150 diesel this quarter, and GM is said to begin sales of an all-new diesel this fall. RAM will not re-introduce its light duty 3.0 liter diesel into the RAM until 2019. That looks to give GM and Ford a new opportunity to offer something for a while, that FCA will not.

Conclusion: Three new products to fuel significant 2018 growth

In the U.S. in March, unit sales of the Jeep Wrangler were up 70% and the Jeep Cherokee was up 63%. The 2019 RAM arrived too late in March to make an impact, but look for it to fuel FCA’s U.S. growth in 2Q and beyond.

For shareholders, this is the culmination of a factory and product restructuring that took place over the last two years. FCA saw declining U.S. unit sales as its factory capacity shrunk temporarily, only to start to blossom yet again in March 2018. FCA’s overall U.S. unit sales were up 14% in March 2018, and these products could help lift that number even further as the year moves along, barring any macroeconomic headwinds.

What’s left on the chess board are now these:

• Jeep Wrangler pickup truck to start production on Toledo, OH, in April 2019.

• Jeep (Grand) Wagoneer to start production in Warren, MI, either in very late 2019 or more likely sometime in 2020.

That will conclude FCA’s U.S. transformation to being almost completely an SUV and pickup truck company. The only cars left will be Dodge Challenger, Dodge Charger and Chrysler 300.

Other automakers view FCA with envy, as the industry profits reside in SUVs and pickup trucks, not in “green” cars that are sold at a loss. The people have spoken, and they want SUVs and pickup trucks. FCA listened and is raking it in, starting especially in March 2018.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are short TSLA. 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.

At the time of submitting this article for publication, the author was short TSLA and long GM and GOOGL. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.