Is Fiat Chrysler the Next Ford Motor Company, or the Next Big Flop?

The newly merged Fiat Chrysler Automobiles (NASDAQOTH: FIATY  )  outlined its strategy to become a global powerhouse automaker last week. CEO Sergio Marchionne plans to drive sales higher, raise profitability, significantly reduce debt, and invest 48 billion euros ($67 billion) in a global expansion led by its Jeep, Maserati, and Alfa Romeo brands. Sounds good, right?

Well, investors and analysts didn't buy it. The plan outlined by Fiat Chrysler Automobiles, or FCA, in combination with its poor first-quarter results, sent the stock into an abrupt plunge by as much as 12% by the middle of the week.

While I think that much of the plan is highly questionable, I remind myself that many questioned Ford's turnaround strategy more than five years ago. Now, Ford's turnaround is considered a story for the ages, a story that will be discussed in business classes for decades. Here are some highlights of FCA's plan, and you can decide for yourself if this is the next Ford, or the next flop.

Jeep Grand Cherokee. Source: Fiat Chrysler Automobiles

Can Jeep save Fiat Chrysler?
The bulk of FCA's turnaround strategy will revolve around three brands: Alfa Romeo, Jeep, and Maserati. Jeep might be the most important, and the most believable, of all the brand presentations (link opens a PDF) dished out to investors.

Jeep will launch the smaller Renegade this year, as well as a new compact SUV in 2016 that will replace the Compass and Patriot models. In 2017 a new Wrangler and Grand Cherokee will hit the markets, followed by a three-row Grand Wagoneer in 2018.

Jeep is expected to lead Fiat Chrysler's global charge, which should bode well for the SUV-based brand, as the segments it competes in are surging in popularity globally. Jeep was the No. 1 SUV brand in the world through 1990, before slipping to No. 6 today. Fiat Chrysler is planning for Jeep to reclaim that No. 1 SUV brand title, and it will need to do so to turn the overall company around.

It is conceivable that Jeep can reclaim that No. 1 spot, and investors can be happy that it's already making visible progress. Jeep's international sales have grown from 18% of all sales in 2009 to account for an estimated 24% of total sales when the books are closed for 2014. The Jeep brand also set back-to-back world sales records in 2012 and 2013 and posted its best-ever monthly sales result in its 73-year history just last month.

In all, as Jeep refreshes its vehicle portfolio, and expands its sales into global markets, it hopes to grow sales from 732,000 last year to 1.9 million in 2018 -- lofty goals, to be sure. But at least Jeep is making progress and has a feasible strategy. The same can't be said for all of Fiat Chrysler's goals and strategies.

Alfa Romeo and Maserati
Alfa Romeo might have been the most disappointing presentation (link opens a PDF) during FCA's investor day, in my opinion. Go ahead and open that link and tell me if you get past slide 18. If you do, you won't find much strategy or many facts to assure investors that FCA can drive Alfa Romeo to reach the lofty goal set for the brand.

Fiat Chrysler plans to inject 5 billion euros into the Alfa Romeo brand through 2018 to roll out eight new vehicles in an attempt to grow sales from 74,000 to 400,000. The Alfa Romeo brand has the potential to drive higher transaction prices and profits for the automaker, but 5 billion euros to reach 400,000 in annual sales -- which is far from a guarantee -- seems a bit expensive. It seems especially expensive when you consider there were very few details explaining where that money was going and how it was going to drive sales.

Maserati Alfieri shown at the Geneva Autoshow. Source: Fiat Chrysler Automobiles

Maserati had a more convincing presentation (link opens a PDF) than Alfa Romeo. From 2012 to 2013, sales more than doubled from 6,200 to 15,400 and revenues from those sales jumped from 755 million euros to 1.6 billion euros. Looking ahead, Maserati is expected to increase its sales more than fourfold from 15,400 units last year to 75,000 by 2018, which would push that 1.6 billion euro revenue to more than 6 billion euros.

To help accomplish this feat, FCA plans to inject more than 2 billion euros into the Maserati brand to expand its vehicle offering to six, including the sleek sports car shown at the Geneva auto show in March. Keep an eye on Alfa Romeo and Maserati vehicles as they begin to roll out, because if they disappoint in sales, it's going to be a big blow to FCA's ambitious turnaround.

Final thoughts
I walked away from Fiat Chrysler's presentations feeling torn. On one hand, the company has compelling ultra-luxury brands like Maserati with a lot of potential, a very profitable Ram Truck brand, and the globalization of the Jeep brand, which should also help drive strong profits. On the other hand, there were some very big questions about the Alfa Romeo brand and how Fiat Chrysler would magically fund this estimated $67 billion makeover. Analysts didn't pull their punches, either.

"The aspiration is big, but the questions are bigger," said Erik Gordon, a professor at the the University of Michigan, according to Forbes

"You're giving me very lofty 2018 targets, which I think are just not credible," said Erich Hauser, an analyst at International Strategy & Investment Group, according to Automotive News.

And my favorite: "The problem is PowerPoint presentations are a lot easier than real life," said Harald Hendrikse, an analyst with Nomura Holdings Inc, according to Automotive News.

So, ultimately, is Fiat Chrysler the next automaker to enact a business turnaround like Ford did? Is FCA an investor's ticket to doubling up (or more) once it goes public? I just don't see it. There's very little data coming from Fiat Chrysler currently to suggest that any rebound is starting, and there aren't enough details in the presentation to give me confidence that such an ambitious facelift will magically take place by 2018.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2014, at 11:41 AM, LouisTewl wrote:

    Well, apparently Daniel Miller is now-tag-teaming with John Roseveer as part of TMF's Anti-FCA hatchet squad.

    Two questions, Mr, Miller - if, as you opine, "Ford's turnaround is considered a story for the ages, a story that will be discussed in business classes for decades." then,

    a. Why are the Land Rover and Jaguar brands, which suffered greatly under Ford's ownership, and which Ford sold at a steep loss, now enjoying their resurgence as the luxury flagships and majority profit-generators for Tata Motors?

    b. Why is TMF no longer long Ford stock, their disclosed previous position, which at least provided some rationale, however venal, for the negativity inflicted on FCA investors by the persistent pro-Ford and GM/anti-FCA advertorials that served only to (further) erode TMF's credibility?

    Finally, if what you say in your above article is true, then why, on last Friday, May 9th, did FIATY stock trade in a very tight range around $10.35 a share on over five times average daily volume, approximately 1.5M shares?

    Somehow the phrases "buying opportunity" and "under accumulation" come to my mind, so, keep up the good work!

    Fool On.

  • Report this Comment On May 12, 2014, at 12:59 PM, TMFTwoCoins wrote:

    Afternoon, Tewl,

    a. First, everything suffered under Ford's ownership prior to Mulally's arrival in 2006, Land Rover and Jaguar included. Ford's main focus during such dire times was to make sure its namesake brand was revived and that was an impressive feat in itself. Now is really the first time the company can throw enough capital to try and revive the Lincoln brand.

    If you want to argue that Ford should have dumped Lincoln and kept Jaguar and/or Land Rover, I might agree. But saying that Land Rover and Jaguar are doing better now somehow takes away from Ford's business turnaround doesn't make sense. Of course Land Rover and Jaguar are doing better now, the entire industry is...

    b. TMF is still long Ford stock, the disclosure was apparently buggy at the time this was published. I know that because I still own F and GM and it didn't specify that.

    Finally, I can't tell you why on May 9th FIATY stock did anything. However, as I was discussing the investor day presentations that took place on May 6th and 7th, in combination with releasing Q1 results, that's what abruptly sent the stock plunging -- enough so that trading was suspended briefly.

    To wrap it all up, sure maybe it's a "buying opportunity". But what are you basing that opinion on? The whole point of this article was to say that so far FCA is just saying "we're going to do this, but we're not sure how yet" -- not exactly a confidence booster for potential investors. I think Jeep and Ram have some great momentum and potential, but I won't be investing until I see way better and more detailed strategies for its other brands, especially Alfa Romeo. Seriously, that presentation was awful...

    I wouldn't say I'm anti-FCA as you stated, I'm just not convinced it has a set strategy to have the next Ford-like business turnaround. Thanks for reading and having a thoughtful comment.

  • Report this Comment On May 12, 2014, at 3:41 PM, LouisTewl wrote:

    Daniel, first, call me Lewis, won't you, or Mr. Tewl? I know you wouldn't want to get censured for being less than respectful.

    In your article, you didn't actually state, "Ford's turnaround under Mulally", so, that would be an editing issue for you, I believe.

    Further, I don't see anything currently that leads me to believe that Jaguar and/or Land Rover would be as strong as brands, and as popular as vehicles today if still owned by Ford as they are being owned by Tata Motors, which says enough about the "impressive turnaround" of which you speak, as does the fire-sale price at which Ford made the now apparently ill-advised judgement to sell them, which seems to have helped allow Ford to escape insolvency and rise to a condition of extended industry-relative stagnation.

    And to try to minimize the unquestionable success and profitability of post-Ford-owned Jaguar and Land Rover by saying, "Of course Land Rover and Jaguar are doing better now, the entire industry is." is, while convenient to your (and TMF's) positions (stock ownership-wise, and, as we all know too well, editorially), that is specious reasoning at best.

    Rather than asking whether Ford should have sold Lincoln instead of Jaguar-Land Rover, with the answer to said question obviously being "Because nobody would pay enough for it to cover the cost of the sale," one might well ask, if Ford is going to manage the Lincoln brand the way it managed JLR, do Ford shareholders really have much to look forward to?

    As far as your saying that "Ford's main focus during such dire times was to make sure its namesake brand was revived and that was an impressive feat in itself, " given that Ford operates globally, its near-demise is more an indication of it's operational inefficiencies than it's strengths, particularly when compared with what Fiat has accomplished from it's weakened condition, both for and by itself, and with Jeep-Chrysler, during the same time period.

    That, IMO, is MUCH more impressive, and why I am long FIATY, and will continue to be, for the foreseeable future.

    As far as your negative comments about Marchionne's presentation, there is a difference between providing for public consumption enough details for the general structure of what is, after all, a massive, multi-pronged global manufacturing and markets expansion plan with a five-year forward-looking view that, in many respects, has no relevant historically-applicable precedent, and saying, as you interpreted it, "FCA is just saying we're going to do this, but we're not sure how yet."

    Finally, I will say to you what I said to JR when he said he, like, you, will "wait and see", which is, you guys, like TMF, IMO, will NEVER post an unbiased FCA article, or recommend or own FCA stock, and your subtle and not-so-subtle undermining editorial motifs (starting from the article titles) have caused discerning investors to recognize these "articles" as what, in reality, they are, namely, Propatorials (Propaganda as editorials) .

    As I told JR, "Yes, wait until FCA is fully listed on the NYSE and trading north of $15.00 per share, then tell us all why we shouldn't own the stock."

    If the Ford "turnaround" story is so "impressive", why hasn't that "story" translated to increased sales, earnings, and stock valuation? Maybe Ford is just that - a "story" stock, after all.

    Of course Ford is doing better - the entire industry is, right?

  • Report this Comment On May 12, 2014, at 5:19 PM, TMFTwoCoins wrote:

    Mr. Louis Tewl, no disrespect intended.

    I apologize for the brief answers as I'm short on time. Monday's...

    We're arguing in pointless circles regarding the brands Ford dumped. You think because those brands are better off now that it takes away from Ford's turnaround. I don't. What we know is Ford turned its namesake brand around on its own dime while Chrysler and GM filed for bankruptcy. Ford produced a profit in 2009 unlike its Detroit competitors and I consider that impressive under the circumstances at the time. The fact that Land Rover is doing better now takes nothing away from that. Maybe it even confirms Ford's decision was best for everyone involved?

    On that same argument. You don't see anything that says Land Rover / Jaguar would be as good now with Ford? One could argue Ford's #1 rank in consumer loyalty over the last couple of years would have carried over -- that's a big deal in the auto industry. We'll never know...

    You said, "given that Ford operates globally, its near-demise is more an indication of it's operational inefficiencies than it's strengths, particularly when compared with what Fiat has accomplished from it's weakened condition, both for and by itself, and with Jeep-Chrysler, during the same time period"

    -- I'm not totally sure I follow. Ford's near bankruptcy, which never came to be, is less impressive than what Fiat did and Chrysler's bankruptcy? What did Fiat accomplish that was so impressive? We agree to disagree here. Also, Chrysler has zero bragging rights over Ford when it comes to operational inefficiencies.

    My comments on the presentations weren't all negative. I was, as were a vast majority of analysts, disappointed with certain parts. I thought Jeep's presentation was very strong and compelling, and comparing Alfa Romeo's presentation to Jeep's made it seem incomplete and lacking needed strategy and details. That's a lot of money to throw at a luxury brand for an assumed 400k in sales without any details on what the vehicles will be, at least so far. That's just my opinion, and again, we agree to disagree.

    I'm bullish on most of the automotive industry right now. If FCA brings more details regarding some of its luxury brands, and the designs are striking and strategy is compelling, I would have no problem being behind FCA at the right price. I'm very bullish on the Jeep and Ram truck brands, which are both very profitable.

    As for your question about Ford's story translating to increased sales, earnings, and stock valuation. I answer unequivocally that it has. Depending on when you want to define Ford's turnaround, consider in 2006 F traded around $7 and in 2009 it dipped under $3 -- now it's near $16. Ford gained more market share in the U.S. than any other major automaker last year as well as recording one of its most profitable years in company history. Ford is also in the process of completing its goal to double its market share in China to help correct the dependence on NA as a weakness.

    Look, you make some good points, and I respect your opinion but FCA has much work to do and there are a lot of questions remaining before I can convince myself it's a sound investment. I just don't see it yet.

  • Report this Comment On May 12, 2014, at 11:22 PM, LouisTewl wrote:

    Daniel - thanks for your considered response.

    Let me clarify. I am not saying JLR's post-Ford-ownership takes away from Ford's turnaround, rather, I say it points out a salient point about Ford, and about the difference between Ford and Fiat.

    Ford is not a luxury car maker, which is why, both from a public perception and "uniqueness of brand" standpoint, JLR suffered, as did Volvo, I might add. These vehicles were popular for their individual and respective identities, not as Ford products.

    As far as Ford's #1 ranking in consumer loyalty, I would argue that if you take away the truck population of that survey (which you should if you want the data for something besides a marketing tool), the results would skew differently. Besides, #1 in loyalty doesn't necessarily mean #1 in quality, dependability, style, features, etc., etc., particularly in the luxury vehicle segment.

    Re Ford's turnaround vs. Fiat, as soon as one became reasonably certain that Ford wasn't going bankrupt, buying the stock was not necessarily a hallmark of financial acumen.

    Fiat, for it's part, in a shorter time frame, with it's factories in Italy operating at less than 50% capacity and workers still under contract, burdened with a high debt level, rescued Chrysler, fully acquired it at a very well-negotiated final price, and has successfully utilized each company's strengths, not to survive by selling off the most profitable assets at fire-sale prices, but through strategically-executed acquisitions and expansions in what were, as you termed it, "dire times."

    For example, rather than closing plants in (2) different European countries, as Ford did, Fiat kept its plants in Italy open through the dark times, and will be again operating them at full capacity to produce the new Jeep Renegade. In this time they also built a new factory in Brazil as part of their global expansion. Fiat also developed its manufacturing joint venture in China which is being expanded to produce the Jeep, as well as at least one for-China-only vehicle model.

    Ford, for its part, wants to sell the new Lincoln SUV to the Chinese at the time their market growth is slowing.

    Do you see the difference? No, FCA doesn't (currently) make as many vehicles as Ford, but re your statement that "Ford gained more market share in the U.S. than any other major automaker last year as well as recording one of its most profitable years in company history," well, I would like to see the data on that "fact," because it sure doesn't apply to the truck sector, where Dodge has been the clear market-gaining winner.

    You must mean the Ford Focus, or maybe the Fiesta (that's the one that JR tried to compare to the new Jeep Renegade)?

    Sales of the Fiat 500, which you leave out of your forward-looking equation, compete very successfully in urban markets against the BMW Mini-Cooper, for example, and while admittedly that may currently be considered a niche market, Fiat has also recently come out with a much larger 5-door which will better address the long-distance-travel market, and, further, the Fiat 500's have quite cleverly served as the beach-head vehicle to establish Fiat dealerships through which Alfa-Romeos can be sold, at least initially, much as Ford did once upon a time with the made-in-Germany Mercury Merkur.

    The difference will be that, while the Merkur failed and the division closed, with the best aspects of the Merkur Scorpion to reappear in the then-new Ford Taurus, which Ford used to save itself at that time, the Alfa Romeo will, in all likelihood, succeed, eventually at stand-alone dealerships or in concert with Masserati, the increased production of which is also part of Marchionne's five-year plan.

    I, too, am busy Daniel - I have to move on to the next-and-latest TMF Propatorial entitled "Fiat Chrysler Automobiles Is Making A Massive Bet On Jeep".

    By way of comparison, please consider the title of the recent TMF article about Ford, "How Ford Motor Company Will Fight Back Against Chrysler's Ram."

    What's the not-so-subtle "subliminal" message in each of these two titles? Fiat-Chrysler=RISKY ( A "Massive Bet") Ford =STRONG (A FIGHTER!), and on it goes, the relentless anti-FCA/pro-Ford & GM drumbeat of the TMF propatorial machine, defending life, liberty, and the pursuit of profits for TMF management and employees!

    Fool On.

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