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.
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 (OTC: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.