Are shares of Fiat Chrysler Automobiles (FCAU) a bargain right now?
When the global markets are making the wild swings we've seen in recent days, it's possible to argue that almost any stock is "undervalued" -- at least for a minute or two.
Compared to other global automakers, the Italian-American hybrid doesn't look so hot at first glance. FCA's profit margins haven't impressed, its level of debt is a very big concern, and sales in one of its most important markets have taken a huge nosedive this year.
But at least one Wall Street analyst thinks that the shares could have quite a bit of upside.
Despite some big problems, Morgan Stanley sees a buy
As reported by Barron's, Morgan Stanley auto analyst Adam Jonas thinks that FCA is looking pretty good. Yes, it's true that FCA has a huge business in Latin America, and that business has taken a huge hit, thanks to big recessions in key countries like Brazil and Argentina. FCA has fared worse in Latin America than many rivals: Industrywide sales in the region fell 18% last quarter, but FCA's fell 30%.
It's also true that -- aside from the Jeep brand -- FCA isn't looking great here in the U.S. Sales of the Ram pickup are up just 4% through July in what has been a very strong market for trucks, and the product-starved Dodge brand is in a big sales slump. FCA's profit margin in North America improved somewhat last quarter, but it still trails those at both of Chrysler's old Detroit rivals.
But Jonas thinks that FCA's shares could jump almost 30%, thanks to some favorable global trends -- and to the upcoming spinoff of FCA's Ferrari brand.
The sum of FCA's parts = more than its market cap?
Ferrari is headed for an initial public offering later this year. The gist of Jonas' analysis is that the Ferrari spinoff will leave the rest of FCA undervalued.
Jonas values Ferrari at $9 billion, and that's roughly half of FCA's total market cap. And while he thinks that some of FCA's brands aren't worth anything (it actually gives Alfa Romeo, Chrysler, and Dodge negative valuations), the value of the Ram, Jeep, Maserati, and Fiat brands will eventually add up to more than what will be left after Ferrari is separated from FCA.
Eventually, that is, if certain trends continue. As noted above, FCA's margins in North America haven't been good relative to key rivals, but they have been improving -- and CEO Sergio Marchionne promises more improvement to come over the next few quarters. Meanwhile, while Latin America remains weak, FCA has been picking up steam (and gaining market share) in long-troubled Europe.
China remains a concern, but FCA has only a small presence there, and the strength of the Jeep brand positions it well for good growth over the next few years, he thinks.
Jonas' price target for FCA is €16, or just under $18.50. That would be a jump of close to 30% above current levels. Is it a good case?
There are big risks that could keep FCA shares cheap
It's likely that the spinoff of Ferrari will boost the relative valuation of the remainder of FCA -- at least in theory. And what Jonas says about trends in Europe and North America is true.
But I remain concerned, as I have been for awhile, about three big things:
- FCA lacks strong entries in smaller car segments in North America. That's not a bad thing right now, as trends strongly favor SUVs and trucks -- but if oil prices jump and SUV sales fall off, FCA is much more exposed than rivals who have invested in strong sedan models.
- FCA has a ton of debt, and that will weigh on earnings for years;
- FCA's product development teams are working feverishly on a slew of new products, all necessary to support the automaker's ambitious growth plans. But most quality metrics rate FCA products poorly, and the product push means that investments in things like factory upgrades (which might improve quality) are being postponed. The quality gap is probably already hurting FCA's sales and pricing power; will the rushed development of all of these new products make things worse?
Long story short: If you're thinking of FCA as an investment rather than as a trade, look very carefully before you jump.