A Fair Look At Fiat Chrysler: Jeep Rises Again

| About: Fiat Chrysler (FCAU)


Fiat Chrysler is a mix of strong performing assets and dying ones.

On the one hand, Jeep is performing extremely well.

On the other hand, Chrysler and Dodge are anemic at best.

Because of the generally higher pricing and margins for Jeeps and the RAM trucks, Fiat has the potential to unlock a lot of earnings value if it can keep weaker assets from damaging growth.

I'd very much like to see the weaker brand names phased out, and more time and energy be put into building up the Alfa Romeo brand as their luxury unit.

Fiat Chrysler (FCAU) is an undefinable entity. Though Italian owned by technicality, the company is arguably more American in terms of its market. A byproduct of the undeniable screw-ups that occurred pre-recession, Fiat absorbed Chrysler when it was in dire straits. Fascinatingly enough, Fiat wasn't really performing all that well at the time either. What they did have were a bunch of cash and an opportunity to get their hands on Jeep and some American pickup trucks.

A Sad Story For American Pride, But A Great Story Of Success

The move paid off. Through Chrysler, Fiat gained an entry point into the US that it hadn't had in a long time. Through Fiat, Chrysler has gained a management team that seems to actually know what they're doing. I'm not going to lie. It may very well be a beefed-up Mazda Miata, but I really want a Fiat 124 Spider. They don't make cars like that anymore. Anyway, in 2017, Fiat Chrysler did over $110 billion (that's in euros) in revenues, with $3.49 billion in net income. Over a five-year period, it was the company's best. The primary reason was the remarkable improvements in gross income.

As a whole, 2017 actually had just under 1% lower sales than 2016. But the company reduced its costs and drove its gross up 19% to $16.96 billion. Couple that with much lower interest expenses due to big reductions in debt, and the automaker increased income by 93% year over year. With minimal increases in shares outstanding, earnings per diluted share increased 89% to $2.24.

Chrysler itself was always considered sort of the runt of the original "Big 3". Interestingly enough, from a stock performance perspective, FCAU has outpaced both Ford (F) and General Motors (GM) over the past few years. The main reason being the tumultuous shift in earnings that Fiat Chrysler has put in motion. They've had the revenue growth for a while now as the auto cycle climbed. What they had to work out were their expenses. Because of the successful improvements to earnings, FCAU stock has more than doubled in one-year period.

Now, in 2018, FCAU is faced with a dilemma. Their business is unbalanced. The Jeep/truck segment is strong, while everything else is kind of dragging things down. With relatively flat revenues of just over $27 billion in Q1, reductions in things like interest expenses and lower income taxes were needed for Fiat Chrysler to increase net income around 30% year over year to $1.02 billion. Diluted earnings per share were $0.65 vs. $0.41 a year ago.

You Might As Well Just Call It Jeep

The thing about Fiat is their entire story right now really revolves around one brand; one of the oldest brands in America. Jeep is experiencing huge growth numbers. The name that's synonymous with 4x4 has had a history of ups and downs sales wise, but it always seems to endure. They got themselves in trouble a few years back by expanding their lineup in a counterintuitive way.

The Jeep Commander cannibalized sales from the Grand Cherokee and Wrangler, rather than actually increasing the bottom line. The Jeep Patriot and Compass were practically the same car, which meant higher manufacturing costs for very little reason, as they canceled out each other's sales. Then came ugly reintroduction of the Jeep Cherokee. We won't go there.

What matters is now. The guys at Jeep have created a simpler, higher quality, updated lineup at Jeep. The efforts are paying off. It's amazing what that Jeep Cherokee could do once they fixed those Wasp headlights. The somewhat compact crossover with some actual four-wheel drive chops is putting up huge sales gains this year. Fiat Chrysler sold 23,789 Cherokees in May. That's a whopping 63% increase! Year to date, the model is up 31% versus 2017. At 91,286 vehicles, the Cherokee is very close to outselling the Ford Explorer.

The new Jeep Compass (the Patriot and Old Compass were subsequently retired) received an awesome redesign. With what some have described as a more "European" look, the small crossover is posting big sales. To date, sales of the car are up 315%. To be fair, this car is the replacement for both the old Compass and Patriot. The sales gains are somewhat misleading because of this. Either way, 72,000 cars is nothing to ignore.

Last but not least, the bread and butter of them all. The Jeep Wrangler. Painstakingly redesigned for 2018, the new Wrangler is different, but very much the same. Why? Because this car's consumer base loves it just the way it is. Small tweaks in comfort that don't corrupt its genetic code are all that is ever really needed. Even then, I fear that too much "tech" would ruin this car's sales. Yes, people are that hardcore. I'm one of them. Through May, the tried and tested brute has had sales increases of 38%.

The reason for this growth could be twofold. One, people like the new model. Two, people are buying up the old model while they can still get it. FCAU has been selling both the former model and the new model conjointly this year in a layover period.

In May, Fiat Chrysler delivered 11% growth in sales. Much of that growth rate is attributable to the Jeep brand. It's been perfectly positioned to benefit from the consumer shift from traditional cars to SUVs, crossovers, and trucks. While this is great, I would point that there are different threats to the parade. The auto cycle has already peaked. Fuel prices aren't stable. And the FCAU lineup as a whole is unbalanced in performance.

Peak auto sales were back in 2016. Sales declined last year, and they'll likely decline this year. Small declines sure, but the point is FCAU is dealing with a slower market. It is important for them to look at margins over total sales gains.

While Jeep carries the workload, everything else is sluggish at best. The Dodge and Chrysler brands are basically worthless. Chrysler's sales figures are in a pretty steady decline. Dodge as a whole is not selling great. This problem must be rectified for FCAU to succeed. The Ram pickup line only moved 2%, but I do feel this is an area with opportunity for improvement. Ram's new truck has experienced production delays limiting the number of these new trucks that the FCAU can get on the lot.

Though pricey to fix, I feel that the revamped model could reinvigorate sales on this front. Trucks are selling really, really well. There's no reason that Fiat Chrysler can't capitalize on that. As long as Jeep demand remains strong, I think the progressive rollout of these new trucks will allow an increase in earnings for FCAU. That money will be needed to help fix the prevalent problems in the other areas of the business.

What I'd Like To See

The thing that will hurt this stock is if the company is forced to put all of its gains on the Jeep/truck side into the losses on everything else. Chrysler is a terrible brand. After twenty years of poor longevity and recalls, everyone in America pretty much knows that. I view it as a dead stick that needs to be phased out. The same can be said for Dodge. I do not want to see the higher margin income from Jeep/Ram being spent to prop up these weak divisions.

The Alfa Romeo brand is back in the US. After a long hiatus, it is experiencing a popular renaissance with the introduction of the Guilia and Stelvio. These are beautiful cars. The Guilia has been particularly well received by car enthusiasts, and it creates an opportunity for FCAU. They need to push this brand name. Make a cheaper model below the Guilia. Keep it a quality vehicle (the Guilia has a fantastic crash test rating) and grow something new. Marketing and branding are everything, and Chrysler is simply too tainted by a history of problems. It's very early in the process, but I truly believe the Alfa Romeo lineup has the potential to become one of the more successful segments in the US.

I truly view the future of the company as a three-segment firm. They can run luxury brand cars through Alfa Romeo, create their main sales through Jeep, and ride the pickup gravy train with Ram. Marchionne recently announced a large planned investment in electric/autonomous and that's all well and good. But the consumer base that buys Wranglers sure as hell don't want the car driving for them. Truck buyers aren't the sort that will care about EVs. I certainly think there's a place for electric cars in society, but I don't think it'll increase total car sales. That's merely an expense required to keep up with competitors.

Much of this is predicated on affordability. Trucks aren't cheap. And yes, fuel prices have been on the up recently. One of the main culprits, in my opinion, is the renewed tension with Iran. If oil remains at current values for a while, it could reinvigorate demand for sedans. That said, Saudi production bumps should allow for some breathing room on that front.

The Stock

The financials for the firm are strong. As I pointed out above, they've maintained good profitability. Though that hasn't been very hard in the last couple years. With over $12 billion in cash/equivalents on the books, the company is well insulated for any major problems. I am particularly pleased by the progressive draw-down in long-term debt that has taken place in recent years. The company owed $22.7 billion in 2013. As of the first quarter of 2018, that number was down to $10.59 billion.

With a P/E around 7, the company is pretty in line with most automakers. People don't overpay for these stocks. To obtain price appreciation, there have to be some actual income gains. Assuming the US economy remains strong, I see FCAU getting those gains. The Jeep brand is just getting started in terms of its newer models, and the Ram pickup has a lot of potential room left.

The company's total sales increased in both April and May. FCAU is setting itself up for some good news in the second quarter. Pay close attention to the June results. If they're strong in Jeeps and trucks, you might want to grab some shares ahead of the Q2 earnings release. Long term, I think the most important thing to note is who replaces Marchionne at the helm. I'll be writing a piece on his predecessor once it's announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.