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In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Fiat Chrysler fights to Survive

You might not have noticed it, but an automotive legend; Fiat Chrysler Automobiles (NYSE: FCAU), has returned to the New York Stock Exchange. This company combines two iconic automakers; America’s Chrysler (one of Detroit’s fabled “Big Three”) and Italian stalwart Fiat.

The return comes as Fiat’s CEO Sergio Marchionne admitted that he is looking outside the auto industry help. It is easily see why, despite record US auto sales, Fiat Chrysler is not doing that well. The company achieved an earnings per share ratio of .2424 on December 31, 2015. It also reported a profit margin of .88% on the same day and it is easy to see why.

Fiat Chrysler reported a net income of $366.84 million from a revenue of $122.76 billion for the fourth quarter of 2015. On the same day, Ford Motor Co. (NYSE: F) reported a net income of $7.373 billion, and Toyota Motor (NYSE: TM) reported a net income of $19.25 billion. General Motors (NYSE: GM) reported a net income of $9.697 billion for the fourth quarter of 2015.

Even though Fiat Chrysler’s revenues are comparable to its competitors, the company simply is not making the kind of money they are. Ford reported a revenue figure of $149.56 billion for fourth quarter 2015 and General Motors made $152.36 billion during the same period.



Why Isn’t Fiat Chrysler Making that Much Money?

On paper Fiat Chrysler has a great deal going for it including a stable of historic auto brands some of which have a loyal following. Its brands include Dodge, Alpha Romeo, Chrysler, Fiat, Jeep, Lancia, Ram Truck, Abarth, and Maserati.

Jeep and Ram trucks in particular are strong sellers in the North American market. Sales are also strong, Fiat Chrysler sold 225,000 vehicles in March 2016, up 14.1% from a year before, Kelley Blue Book researchers estimated. Kelley’s experts also predicted that Fiat Chrysler could enjoy the best month of all auto manufacturers in the US in March.

Strong sellers included everything Jeep, the Dodge Caravan Minivan, the ever-popular Ram trucks and Chrysler’s Town & Country Minivan. Jeep is on course to post record sells in March as it celebrates its 75th year in the four-wheel drive business.

Yet despite all that Fiat Chrysler is not making that much money, largely I suppose from its exposure to Europe. Another problem is that its car brands are fairly weak. The strongest Dodge sales are in pickup trucks and vans – which do not necessarily sell that well outside of North America. Fiat and Dodge cars lag behind industry leaders like Toyota.

What do Fiat Chrysler’s Financial Numbers tell us?

Fiat Chrysler’s financial numbers help explain why it is not making that much money despite its sales. The company reported a free cash flow of $2.142 billion and a cash from operations number of $10.83 billion on December 31, 2015, which sounds good.

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Yet it reported a cash from financing number of -$3.473 billion which is bad. Ford reported making $14.32 billion in cash from financing in fourth quarter 2015 and General Motors reported making $13.69 billion. That indicates the company is not getting any float from auto loans or leases. Part of the problem is that a lot of loans for Chrysler products are generated by credit unions and banks, not by the company.

Unlike Ford and General Motors, Chrysler does not have a lot of float from its financing. It also lacks cash sales in some foreign countries like China, which GM and Ford rely upon for extra revenue. American automakers historically rely on financing sales in the US and Canada for float to sustain their operations and cash sales overseas (particularly in developing nations where American cars are often viewed as a status symbol) to generate extra profits.

Fiat Chrysler reported having $24.10 billion cash and short-term investments on December 31, 2015. That’s better than GM which reported $23.04 billion on the same day but nothing compared to Ford which had $62.27 billion in the bank at the end of 2015. Toyota had $37.62 billion in cash and short-term investments on the same day.

This means Fiat Chrysler is about as healthy as GM but not as healthy as Ford. Its major problem is that it lacks some of the cash some rivals have access to.

Is Fiat Chrysler a Value Investment?

Many value investors will be attracted to Fiat Chrysler because it is cheap; it was trading at $8.08 a share on March 31, 2016. The car combine also reported a market capitalization of $13.72 billion and an enterprise value of $20.29 billion on the same day.

Despite this I would say that Fiat Chrysler is not a value investment because it looks like a weak company sustained by some very strong brands. Dodge and Jeep in particular have great reputations in the US.

The problem is that it looks like the strong American brands are being used to sustain weak European ones. To make matters worse, profits from US sales are being used to make up for losses in Europe and Latin America.

My prediction is that Fiat Chrysler will survive and make some money but it will not be a strong company. Expect this company’s stock price to stay low for a long time to come.

Disclosure: the blogger is a lifelong Dodge fan who currently drives a Grand Caravan, although he refuses to buy Fiat Chrysler stock.