Fiat Chrysler Automobiles (NYSE:FCAU) is set to report second-quarter earnings on Thursday.
What the analysts are saying:
- Buy or sell? Thomson Reuters tracks 25 analysts covering the Italian-American automaker; 8 think it's a buy, 6 say "hold," and 11 think it'll underperform the market.
- Earnings? The consensus of the group is that FCA will earn $0.18 per share.
What management says
CEO Sergio Marchionne made waves when he took over last quarter's earnings call to deliver a plea for global consolidation in the auto business. Marchionne is known to have approached General Motors (NYSE:GM) about a merger -- he was promptly rebuffed -- and may have spoken to other automakers as well.
Marchionne's point that the auto industry suffers from too-high costs and an excess of production capacity is a fair one. But his critics (including this Fool) have countered that those issues don't seem to be hampering FCA's key rivals quite as much as they hamper Marchionne's company.
To be fair, Marchionne has done a tremendous job over the last few years, turning two likely doomed regional automakers into a (maybe) viable global one. A five-year plan, announced in May of 2014, aims to further the company's consolidation and boost profit margins with a slew of new luxury products and a big expansion in the Jeep SUV brand's global presence.
But here's the big question that will need answering when FCA reports earnings tomorrow: Can FCA turn its big truck and SUV sales into more profits?
The big question management needs to answer
It's no secret that Americans have been buying SUVs and big pickups in droves, thanks in part to the lower gas prices we've seen since last fall.
Both of FCA's Detroit rivals have made a lot of hay on that trend. Last week, General Motors (NYSE:GM) reported that its profits in North America doubled on big sales of pickups and its wildly popular (and expensive) full-size SUVs. GM's operating profit margin in North America was an outstanding 10.5% for the quarter, a level more often associated with high-profit luxury-car makers.
But as good as GM's second-quarter results were, old rival Ford (NYSE:F) arguably did even better. Strong demand for its all-new F-150 pickup and big sales of its new Edge SUV helped Ford secure an all-time record $2.6 billion pre-tax profit in its North American unit, with an eye-opening 11.1% operating profit margin.
Simply put, both Ford and GM are making more money in North America than they have in years thanks to strong entries in the full-size pickup and big-SUV market segments.
Fiat Chrysler's global product portfolio has a lot of holes -- holes that Marchionne and his team are scrambling to fill. But one thing the company does have going for it right now is a set of strong entries in exactly those segments in North America.
Like its rivals, FCA also sold a lot of pickups and SUVs in the second quarter. But that was also true in the first quarter, when FCA's NAFTA unit reported a very thin 3.7% operating margin, far behind Ford and GM.
During last quarter's earnings call, CFO Richard Palmer promised that efforts to boost the company's margins in North America were already under way. The big question for Palmer and Marchionne on Thursday: Are those efforts bearing fruit yet?
What this Fool says
FCA is pouring lots of money and effort into a slew of new-product initiatives that it hopes will pay off big -- in a few years. But I say it needs to focus right now on boosting profit margins in Chrysler's old backyard.
The clock is ticking, because the auto industry is cyclical. Automakers -- the ones that will thrive long term, at least -- know they need to make the most of good market conditions as they arise, so that they have the money to continue expensive new-product development programs when sales and prices aren't so strong.
Right now, conditions in the huge U.S. market are just about ideal for FCA's mix of products. With the popular Jeep SUV lineup and the well-regarded Ram pickups, FCA looks to be perfectly positioned to be making big money.
That opportunity won't last. Meanwhile, FCA isn't making much money elsewhere -- and it's spending billions on all of those new products. Can it pivot in time to make the most of this market boom?
That's the question, and it's much more important right now than a few extra pennies in earnings per share in any given quarter. We'll know more on Thursday.