With auto sales sliding across the globe, investors looking to latch on to Fiat Chrysler Automobiles (NYSE: FCAU) could be hesitant. The key question for investors is a simple one — can FCAU stock shake off the rust of a weak 2018 and hit a higher gear in 2019?
There’s a strong sentiment that next year looks rosier for Fiat Chrysler and for auto stocks in general.
FCAU Stock at at Glance
The Chrysler brand has had multiple dance partners over the years, with the latest tango a merger between Fiat and Chrysler in 2014 and with an informal business relationship dating back to 2007. Prior to that, Chrysler was paired with Daimler for nine years.
Even Chrysler’s origins involved another company.
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In 1925, when Chrysler was founded by Walter Chrysler, it rose from the ashes from the Maxwell Motor Company, which was reorganized into Chrysler. Chrysler would eventually scoop up big industry brand names like Lamborghini, Jeep and Eagle (the latter two from the purchase of American Motors), to join up with its already successful Dodge and Plymouth divisions.
Today, excluding cars built by Fiat, Chrysler is the 12th largest automaker in the world, and as the year ends the company seems to be building momentum.
The automaker’s third-quarter numbers clocked in strong, at a record $1.07 billion, a 50 percent uptick from one year earlier. Fiat Chrysler also bested Wall Street consensus while topping the adjusted operating profit posted by Ford Motor Co. ( F), its primary rival.
Company officials touted a decline in debt reduction costs, robust performance in North America, stronger margins in Latin America and solid profits on FCAU’s luxury Maserati brand as big reasons for the earnings boost.
Fiat Chrysler is trading at $14.77 per share, down from $25 at the start of 2018. The one-year consensus price target estimate is right where it was at the start of 2018 — $25 per share.
Fiat Chrysler bucked a negative trend in November, with vehicle sales up at a 17 percent clip for the automaker. Dodge Ram pickup trucks had a particularly strong month — up 42 percent. Meanwhile, Jeep Cherokee, Wrangler and Compass SUV models were all up 20 percent for the month — all good signs for a company that was among the first automakers to prioritize light trucks and SUVs over sedans.
For Fiat Chrysler, that move already seems to be paying off, as auto sector sedan sales slid downward in November.
Pros to Buying FCAU Stock
Stock buyers increasingly see value and opportunity with FCAU, as the automaker is viewed as a positive outlier in a mediocre auto sales climate.
“We recently got long FCAU and made it one of our larger positions,” says Patrick McDowell, portfolio manager at Arbor Wealth Management in Destin, Florida.
McDowell points to several factors that have him bullish on the stock.
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It’s a good value. The company is cheap on just about any metric for a profitable going concern. “Auto investors appear to be pricing in 2008-level auto sales on a go-forward basis,” McDowell says. “Fiat Chrysler thinks they can be profitable even in that scenario.”
The company has plenty of cash. Fiat Chrysler has quite a bit of cash on the balance sheet and that cash balance will grow with the Magneti Marelli sale (to KKR’s Calsonic Kansei, in October), McDowell points out. “That should mean FCAU ends the year with around 40 percent of the market cap in cash,” he says.
Another merger could be near. McDowell believes the entire company is ripe for a merger or acquisition in the near future. “We think the auto parts and potentially the robotics arm Comau businesses being sold are a prelude to a full-fledged sale or merger of the company with a rival,” he says. “In order to fetch a better price in a potential sale, we think a tender/buyback or a stronger dividend is in the cards in the near future.”
Geography counts, too, when kicking tires on Fiat Chrysler stock.
“FCAU in North America is certainly in very good shape,” says Fred Hubacker, managing director at Conway MacKenzie in Detroit and a former Chrysler executive. “They’re one of the few winners as the November U.S. sales results are in and they’ve improved year-over-year by approximately 17 percent.”
North America is the “sweet spot” in the global auto market right now, as SUVs, crossovers and pickups are dominating consumers’ preferences with more than 60 percent of new vehicle registrations, Hubacker says.
“Fiat Chrysler is doing very, very well with those products,” he says. “FCA publicly declared a few years ago that they were getting out of the car business. As a result, their car business is a relatively minor part of what they manufacture now. They currently have one car assembly plant in North America, as the rest of their manufacturing is centered on Jeeps, pickup trucks, crossover, SUVs and minivans.”
Cons to Buying FCAU Stock
Perhaps “cons” isn’t the watchword here for potential FCAU stock buyers, as the company looks like it’s in good financial health in late 2018. That said, some risk assessment is in order before pulling the trigger on Fiat Chrysler.
“Business is good in the auto sector, as auto companies are reporting record earnings and profits,” says George Schultze, founder and hedge fund manager at Schultze Asset Management. “Tariff issues have spooked some consumers but that impact has mostly been felt in China — for Fiat, that has translated into one-time lower sales of Maseratis in China.”
Commodity inflation has also been an issue with increasing costs for U.S. manufacturers.
“However, the U.S. economy has been growing very rapidly and so auto companies have been able to largely pass onto their customers the increased costs,” Schultze says. “Meantime, Fiat has also had one-time increased costs due to startup production for a new model rollout.”
The Bottom Line on FCAU Stock
Fiat Chrysler is on the right path in steering toward light truck and SUV manufacturing and sales over sedans, and the company has a strong balance sheet and board-level commitment to spend billions of dollars on developing high-growth electric vehicle models, says Schultze, whose firm holds FCAU stock.
“Fiat’s recent rating upgrade, to investment grade status, implies that it’s very well-positioned for the next downturn,” he says. “In fact, Fiat has been selling and spinning off certain assets at attractively high valuations while simultaneously paying down debt and focusing on high growth models with their enhanced cash flow.”
[See: 7 Auto Stocks to Drive Income.]
Overall, Schultze says he is “very impressed” with Fiat’s fundamental positioning and also believes that management’s recent announcements should boost FCAU’s share price.
“Those moves include the sale of its Magneti parts business at an attractive valuation, plus their commitment to pay shareholders a special dividend and also initiate a new regular dividend,” he says. “Both announcements bode well for its future stock price.”
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Pros and Cons to Buying Fiat Chrysler Automobiles (FCAU) Stock originally appeared on usnews.com
