3 Key Takeaways From Fiat Chrysler Automobiles' Improved First Quarter

FCA's Jeep Cherokee continues to help drive company profits. Image source: Fiat Chrysler Automobiles.

You can argue that the latest quality survey frowns upon Fiat Chrysler Automobiles' (FCAU) brands, including Jeep, but you can't argue that consumers aren't still driving the automaker's SUVs off dealership lots in droves. Thanks in large part to its hot-selling Jeep brand, as well as sales of its Ram truck, FCA posted a much improved first-quarter net profit compared to a year ago. Let's take a look at some of the financial figures and three takeaways for investors.

FCA's adjusted-EBIT nearly doubled in the first quarter to 1.38 billion euros, which was ahead of consensus estimates calling for 1.23 billion euros. In terms of becoming more profitable, albeit still far behind Detroit's larger automakers, it was a strong quarter; however, one of the major takeaways was the rise in FCA's debt.

Going the wrong way
The automaker's net industrial debt jumped to 6.59 billion euros from 5.05 billion euros at the end of 2015. FCA noted the jump was partially due to seasonal and currency headwinds.

However, the automaker's debt pile is worse than it appears if you're simply looking at its net industrial debt figure. FCA's total debt is a much higher 26.55 billion euros, but then the company's net industrial debt figure takes its cash and cash equivalents, among other items, in consideration to offset part of that total debt figure. General Motors, for example, has a total automotive debt of $10.8 billion, and that figure doesn't take into account the company's $18.5 billion pile of cash and current marketable securities. So investors need to be sure to compare apples-to-apples debt figures between automakers. To be fair, FCA's total debt actually declined from 27.78 billion euros at the end of 2015. 

Beyond just the vast total debt figure, it's also troubling that the figure continues to move in the wrong direction. That's because CEO Sergio Marchionne set a goal to wipe out the company's net industrial debt by 2018, but that goal appears increasingly difficult to attain, especially if the U.S. encounters a slowdown in sales of SUVs and large trucks -- North America generated nearly 90% of FCA's first-quarter profit.

"The higher debt seems to be the main negative ... and the question remains whether the profits can be replicated in future," a Milan-based trader said, according to Fortune.

Comparative advantage
FCA is essentially pushing all-in on production of bigger and more profitable vehicles. Marchionne dished out details of the goal to exit the small and midsize passenger car business in the U.S. and transition more plants to producing faster-selling SUVs and trucks.

"It has gotten a lot stickier on the passenger car side," Marchionne told the Associated Press. "I think the call that we made to exit those businesses as producer in the United States in hindsight was probably one of the best calls we made."

More specifically, FCA plans to retool a factory in Sterling Heights, Michigan, from producing the less-than-popular Chrysler 200 midsize car, and will instead produce the new Ram pickup truck, due out in early 2018. Next, a factory in Warren, Michigan, that currently produces the Ram pickup will transition to producing the Jeep Wagoneer or Grand Wagoneer. Currently, the futures of FCA's small and midsize cars, which automaker will help produce them and where they will be manufactured, are up in the air.

On the bright side
While massive recalls have become more the norm in recent years, investors received a bit of good news concerning FCA's recent global recall of 1.1 million cars and SUVs. The recalled vehicles have electronic gear shifters that move forward or backward to select the gear, rather than moving along a track. Due to some drivers not pushing the gear forward three positions, some consumers exited the vehicle without the vehicle being in park, causing roll-away crashes. 

FCA noted it was aware of at least 41 injuries potentially related to the problem, which covers the 2012-2014 Dodge Charger and Chrysler 300 sedans, as well as the 2014-2015 Jeep Grand Cherokee SUV. Fortunately, during the first-quarter conference call, Marchionne explained that the issue would be fixed with a software update and no physical changes would be required, and that the recall would have little impact on FCA's future earnings.

Ultimately, it was a more profitable first quarter for the automaker, but investors remain uneasy as the company moves all-in on SUVs and trucks by transitioning factory production in the U.S., all while trying to expand its Maserati and Alfa Romeo sales and wipe out industrial debt by 2018.