Should You Buy Stock in Chrysler?

Chrysler's latest overhaul of its Ram pickups produced some very strong products, thanks to help from Fiat. Photo credit: Chrysler

By any measure, the turnaround of the Detroit automakers over the last few years has been remarkable.

After years of losses and struggles, Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Chrysler are now solidly profitable -- and all three have strong new products that compete well.

As investments, Ford and GM have worked out very well. Ford's stock has had a tremendous run since the dark days of early 2009. GM's stock stumbled after its November 2010 initial public offering, but has since bounced back -- and then some.

Now Chrysler says that it has filed for an IPO. It's expected to happen later this year. But will Chrysler stock be a buy like GM and Ford?

I own stock in both Ford and GM, and I think both are positioned to deliver strong gains over the next couple of years. 

But I'm not going to rush out to buy Chrysler when it goes public later this year. Here's why.

The cases for Ford and GM were clear
Buying Ford when I did way back in 2009 wasn't a low-risk move, but the case for Ford has since become much clearer. The formula Ford used to restore big profits in North America is now being implemented in Europe and Asia. Those changes mean Ford's profits are likely to grow significantly over the next few years.

Likewise, GM's stock wasn't a slam-dunk buy when it first returned to the public markets. But as GM's new leadership has impressed with its button-down approach, and as more and more new GM vehicles turn out to be at or near the top of their classes, it has become clear that the restructured auto giant is on the right track. The case for investing in GM stock has likewise become stronger.

Chrysler is also doing well thanks to a bunch of much-improved models. But beyond that, it's a very different story.

Chrysler's IPO might not be in its best interest
First of all, the IPO isn't necessarily something that Chrysler's management wants. Chrysler CEO Sergio Marchionne is also the CEO of Italian automaker Fiat (NASDAQOTH: FIATY  ) , which took control of the Detroit automaker as it emerged from bankruptcy in 2009.

As part of that deal, Fiat got a majority stake in Chrysler. But it didn't get 100% ownership: A substantial chunk of Chrysler stock, more than 40%, remains in the hand of a trust established to fund health-care benefits for Chrysler's retirees.

That trust, called a "voluntary employee beneficiary association," or VEBA, was created as part of a landmark deal between the Detroit automakers and the United Auto Workers several years ago. Chrysler couldn't continue to fund the trust once it was in bankruptcy, so a deal was struck: The trust would get a stake in the new post-bankruptcy Chrysler, and eventually Fiat -- or somebody -- would buy it. If not, the trust had the right to offer a percentage of the shares on the open stock market.

The VEBA's administrators really want to sell their stake in Chrysler, and Fiat really wants to buy it. But they haven't been able to agree on a price. The dispute went to court, but a trial could take a year or more to resolve. Both Fiat and the VEBA would like to get this resolved sooner -- by the end of this year if possible.

That's where the IPO comes in. But Fiat isn't happy about it.

Chrysler's hand was forced, and Fiat isn't happy
The folks who run the VEBA think that the best way to set a fair price for their stake is to see what the stock market thinks it's worth. It's hard to argue with that idea -- but Marchionne wants Fiat to have 100% ownership of Chrysler, so he can merge Fiat and Chrysler into one unified company. An IPO would make that a lot more complicated.

The VEBA apparently convinced Chrysler to file the IPO. But the IPO documents make it clear that Fiat isn't happy. Among the risk disclosures made by Chrysler: "Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us. This could include decisions on capital preservation and allocation, investments and locations of production facilities."

In other words, the partnership that saved Chrysler might be in trouble if this offering happens.

Can Chrysler thrive without Fiat?
I don't think it can.

The world has changed since Chrysler's heyday. The automakers that will thrive in the years to come are global giants, with operations all over the world that give them vast economies of scale. Without Fiat, Chrysler is a small regional player. It won't be able to compete effectively with Ford, GM. Toyota (NYSE: TM  ) or the other global players that dominate the U.S. auto market.

The magic of the alliance with Fiat is that it gave Chrysler, which had strength in the U.S. and in trucks and SUVs, an ally that had strength in small cars in Europe and South America. If the two could function as one integrated company, that entity had a chance of thriving as a global contender.

Marchionne and his team have made (surprisingly) good progress toward that goal since 2009. And it's possible that the threat to pull back from Chrysler is just a bluff. At this point, Fiat's ability to compete with GM,Toyota, and the rest without Chrysler may not be much better than Chrysler's without Fiat.

And it's still far from a sure bet that the Chrysler-Fiat mashup will thrive on a long-term basis even if it does work out well. But that's an article for another day.

The upshot: I'll watch, but I wouldn't buy
Long story short: Unlike Ford and GM, the case for Chrysler is muddled even in the best of circumstances. And the way this IPO is happening makes it clear that these aren't the best of circumstances.

I think it's very possible that this IPO won't actually happen, that Fiat and the VEBA will cut some sort of deal once they have a clearer idea of what the market will pay for Chrysler stock.

But if it does happen, I'll be steering clear. Stay tuned.

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  • Report this Comment On September 24, 2013, at 9:39 PM, Jazzenjohn1 wrote:

    I wouldn't buy Chrysler stock, but it is very unlikely it will actually be offered at all. The better buy is Fiat, They own a huge chunk of Chrysler and paid 40 million to Not have anyone bid for the rest of Chrysler against them. The IPO is the VEBA's nuclear option to get the best price, and Fiat's threat of cutting them off is their nuclear return option. If the IPO dance determines Chrysler stock to be very valuable, then Fiat owns the biggest part of it, a win for Fiat. If not, then they get to buy the rest cheap. Fiat has no distribution or presence here in the U.S. and they get that along with Jeep. Chrysler is here only so they get instant foreign exposure as well as small fuel efficient tech. A win for the combined company. Thus I Believe this is simply a high stakes negotiation as to best price, and no IPO will happen, Fiat wins no matter how it plays out.

  • Report this Comment On September 25, 2013, at 9:01 AM, TMFMarlowe wrote:

    @Jazzenjohn1, as usual you're on point (though I would remind everyone that even though Chrysler's biggest asset is the Jeep brand, its real cash cows are the Ram pickups first and the GC second, and both are super-important.) I strongly agree that the scenario you outline is the most likely outcome. But you and I both know that these things sometimes don't go the way the parties expect them to go, so -- since we talk about stocks here -- it's worth keeping a close eye on this process, and I will.

    Thanks for stopping by.

    John Rosevear

  • Report this Comment On September 25, 2013, at 9:05 AM, TMFMarlowe wrote:

    @Jazzenjohn1, but now that I think about it, a question for you. Would you really recommend Fiat as a buy? I don't think I would, because (this is way oversimplified, of course) I think that VW has beat them up too much in their core markets.

    But I should take a closer look and do an article on that. Maybe next week.

    John Rosevear

  • Report this Comment On September 25, 2013, at 10:52 AM, Jazzenjohn1 wrote:

    I own Fiat stock and also recommend buying it. The base stock includes about 60% of Chrysler and if it is worth 10 billion, and I think it's worth more than that, it represents 6 billion dollars of Chrysler. The market cap for Fiat is about 10 billion dollars. If it's worth 27 billion, the highest number I've seen for a Chrysler value, That represents 15.66 billion.

    Second, although Fiat has a poor reputation here, it is an old and outmoded opinion. There is no doubt they have improved by a huge amount but because they haven't sold any cars here in the interim our opinion isn't reflected by their current quality, but by our opinions from 30 years ago. Chrysler has often sold cars made by other manufacturers under their name and if the old Fiat rep is a hindrance they will sell them as Dodge cars, like the Dart. The synergy of the 2 companies is very good. Fiat has no suppliers or dealers in the U.S. or exportable trucks or suv's, but Chrysler does. Chrysler doesn't sell outside of the U.S but Fiat has all that, as well as small car, fuel efficient tech. that Chrysler needs. Really a good match.

    Marchionne's both the guy promoting the IPO for Chrysler supposedly attempting to get the highest price, but he's also the potential buyer wanting at the lowest price. A huge conflict of interest. That's why he put in the IPO offering the statements that Fiat may decide not to pursue a merger.

    I see Fiat winning in any scenario. If his comments in the IPO disclosure deflate the value, he gets Chrysler cheap. If it is ignored and the price is at or above the negotiated max price, he has a contractual top price he can pay stopping the IPO and getting the shares at or below their value. Anywhere in the middle saves him money and hurries the process vs. the court system and he also wins from the synergy.

    I suppose that there is a very small possibility that he might let the IPO happen and then sell his shares. He'd get a huge instant gain from the sale, since he got it for nearly nothing, and at the same time gut punching Chrysler. I don't see that as very likely to happen.

  • Report this Comment On September 25, 2013, at 6:25 PM, GaryDMN wrote:

    Partner with a union, ha.

  • Report this Comment On September 25, 2013, at 6:58 PM, AlfordPlea wrote:

    My whole question, which I have yet to see addressed anywhere, is how (if at all) will existing Fiat shareholders benefit from a Chrysler IPO? Will they automatically be granted access to the IPO?

    Will there be some sort of conversion? What exactly are the potential effects for current Fiat shareholders?

    Everybody's real quick to weigh in on Chrysler, which is relatively easy, and, by the way, I think you all are wrong in your undervaluation of Chrysler as an entity, (which I see as a result of provincial thinking), as they are in planning to expand into the China market.

    Otherwise, I agree with most points in the above article, but it's not really anything not already known--so, finally, I really think the million dollar question(s) are the ones I raised here. Anybody?

  • Report this Comment On September 25, 2013, at 7:11 PM, chopchop0 wrote:

    Stay away from cars. Invest in airplanes. Ba is where it's at

  • Report this Comment On September 25, 2013, at 7:20 PM, SkepikI wrote:

    <Can Chrysler thrive without Fiat?>

    Stick to the first three words. The real question is can Chrysler thrive in any way shape or form long term. For decades I was a Chrysler guy, starting with my 67 Barracuda (damn I wish I had kept that car!) an on and off investor, and great admirer of Lee Iaccoca. NO MORE. Fool me this: If an enterprise has to be bailed out TWICE in a single generation, what sort of mental deficiency must you have to invest in it the second time?

    Just the residual bad will alone has enough tonnage to sink the ship.

    No sympathy at all for you if you volunteer for the third collapse.

  • Report this Comment On September 26, 2013, at 4:06 AM, secretcog wrote:

    In steps Elon Musk...hypothetically speaking. I heard that Chrysler plans on producing lithium ion battery powered vehicles ($30k) with a terrific range to compete against the Tesla and then I heard that Tesla will offer a less expensive model ($35k) than their current offerings.

    To add a twist...Tesla is considering opening battery manufacturing plants. Sooo...what is Chryslers next step?

    In my hypothetical imagination, maybe a Tesla/Chrysler merger/partnership could heal all current issues for both companies.

    Stranger things have happened and it would certainly take a toll on all parties involved.

    Would I purchase Chrysler stock as it is? Yes. Absolutely YES. There are three types of people...Ford owners, Chevy owners and Chrysler owners. Well...there's a fourth, and that's everyone else.

    Chrysler has Dodge, Jeep and the Ram line. Those are proven survivors. They won't be going anywhere soon and Fiat isn't even an issue. If Dodge pulls off a fuel free car and even a fuel free muscle car...they will change the game.

    As far as global dominance...that's all relative to speculation...not perspective. We really aren't a global system "yet," and when we finally get around to it, maybe we'll see Chrysler build overseas plants to cover an overseas market. Unless...they have already...to which I am unaware.

    I'm still learning about the stock market and I'm going to share your warning with my wife and we'll delve into this deeper. Out of all of the online stock sites I have researched, Motley Fool appears to be consistent with what's really happening. It seems like MF forecasts are more prophetic than speculative. <---take this last sentence lightly.

  • Report this Comment On September 26, 2013, at 12:21 PM, BradfordP wrote:

    If a bungled IPO takes place, the price is likely to be low in view of FIAT's objections. Once the stock is public, however, FIAT would be able to start buying up the stock at a lower price. Once FIAT makes an offer, the price is likely to be higher. I wouldn't bet the store on it, but it would be worth buying some stock in the IPO for the post IPO merger proposal.

  • Report this Comment On September 26, 2013, at 8:33 PM, SuntanIronMan wrote:

    @secretcog

    I believe you are thinking of General Motors as the company that recently announced its intention to create a Tesla-like car at a lower price point.

    Unless I'm mistaken (which is certainly possible) and Chrysler also recently announced similar plans.

  • Report this Comment On September 28, 2013, at 12:38 AM, SkepikI wrote:

    <Would I purchase Chrysler stock as it is? Yes. Absolutely YES. >

    You have been warned. TWICE. No sympathy.

  • Report this Comment On September 28, 2013, at 2:08 AM, AlfordPlea wrote:

    Checking back in, I see that nobody, including John R. have weighed in on the deal-related issues that I have raised and am STILL seeking answers for.

    Even if nobody knows, per se, anybody half-way familiar with IPO scenarios could speculate, but nobody in the online investment community has yet to address this core issue about the whole Fiat/Chrysler/VEBA deal. Why not? Is it because it's easier to talk about car companies and their products and markets than it is to talk about complicated car company deals? Apparently so.

  • Report this Comment On September 30, 2013, at 9:34 AM, Jazzenjohn1 wrote:

    I don't think anyone will come back with an answer because the questions you ask probably haven't been determined yet, and may not ever be determined depending on if the IPO happens. I still believe there will not be an IPO at all so I tend to think the questions are moot. I pointed out in a previous post, the guy running both Fiat and Chrysler, the same guy that wants to buy Chrysler and Not even have an IPO, is the same guy that is negotiating the IPO. You are looking for very specific details of an IPO that has just been announced and certainly hasen't been finalized as to the conditions, and we are still talking about whether it will even happen at all? What makes you so sure it will?

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