What happened
Shares of Fiat Chrysler Automobiles (FCAU) were down sharply on Monday, as a sharp drop in oil prices and rising fears of a coronavirus pandemic drove a broad-based market sell-off.
As of 3 p.m. EDT, FCA's shares were down about 10.8% from Friday's closing price.
So what
It may seem counterintuitive that an automaker's share price would fall with oil prices, particularly an automaker like FCA that generates much of its profit from gas-burning SUVs and pickup trucks.
FCA's Maserati luxury brand is based in Modena, inside Italy's quarantined "red zone." Image source: Fiat Chrysler Automobiles.
But the growing threat of a recession has investors worried. Auto sales are cyclical, rising and falling with consumer confidence. Because FCA, like most automakers, has high fixed costs, a moderate drop in sales is likely to lead to a drastic drop in profit.
More urgently, the Italian government's decision to quarantine a broad area of northern Italy has direct consequences for FCA, which has 10 factories inside the quarantined "red zone" around the cities of Milan, Turin, and Modena. Investors are right to be concerned about production disruptions that could last for weeks, if not longer.
Now what
FCA had a strong 2019, and in early February it guided to another good year in 2020. But it hedged that guidance with concerns about the COVID-19 coronavirus outbreak, which at the time was threatening to disrupt production at key suppliers in Asia.
Given that the situation is considerably worse now, investors shouldn't be too surprised if FCA cuts its forecast for 2020 in the near future.
