Today’s auto market is increasingly brutal. Even successful automakers such as Fiat-Chrysler (NYSE: FCAU) feel the need to merge to survive.
Fiat-Chrysler Automobiles and PSA Group; the owner of Peugeot and Citroen, signed a “binding combination agreement” on 18 December 2019, The Detroit Free-Press reports. The companies plan to combine to meet the challenges of electrification and autonomous vehicle development.
The deal will bring several historic auto brands together under one roof. Fiat-Chrysler owns Jeep, Ram, Chrysler, Dodge, Fiat, Alfa Romeo, and Maserati. Meanwhile, the PSA Group owns Peugeot, Citroen, Opel and Vauxhall.
An obvious reason for the merger is to give the PSA Group access to North American markets. PSA concentrates its operations in Europe. Another goal of the merger is to give PSA access to Chrysler, Ram, and Jeep’s popular pickup trucks, vans, and sport utility vehicles.
Is Fiat-Chrysler Making Money?
Strangely, Fiat-Chrysler is making some money. Fiat-Chrysler reported a gross profit of $3.952 billion on revenues of $30.382 billion on 30 September 2019.
However, Fiat Chrysler reported a -$199.05 million loss after tax, a -$214.55 net loss, and an operating income of $552.66 million on the same day. However, Fiat-Chrysler’s revenues and profits grew.
FCAU reported revenues of $30.057 billion in June 2019 that grew to $30.382 billion in September. Interestingly, Fiat-Chrysler’s gross profit grew from $25.952 billion in June 2019 to $26.43 billion in September.
In contrast, Fiat-Chrysler reported four straight quarters of shrinking revenue growth. In particular, Stockrow estimates Fiat-Chrysler had a revenue growth rate of -5.3% in the quarter that ended on 30 September 2019.
How Much Cash Does Fiat Chrysler Have?
So Fiat-Chrysler is making money but struggling to maintain its revenues and keep that money.
In addition, Fiat Chrysler is generating some cash. Fiat-Chrysler reported an operating cash flow of $2.56 billion and an ending cash flow of $445.75 million on 30 September 2019.
Impressively, Fiat-Chrysler had $18.291 billion in cash and short-term investments on September 30, 2019. Thus, I think Fiat-Chrysler is a healthy company because it is cash-rich. However, Fiat-Chrysler’s management feels it need to merge with PSA for survival.
Why Fiat-Chrysler and PSA are merging
The PSA Group and Fiat-Chrysler are merging because of what the auto industry is becoming.
To explain, the auto industry built the entire vehicle and sold it to the driver. Thus, the driver was the customer and the profit center.
In contrast, in the new auto industry, the “customer” will be autonomous vehicle companies such as Waymo. Waymo, an Alphabet (NASDAQ: GOOG) subsidiary, will provide the operating system; or software, that drives the car. Companies such as Fiat-Chrysler will provide the vehicle or the hardware.
Fiat-Chrysler is a Hardware Company
Waymo offers an operating system for autonomous vehicles it calls the Waymo Driver. The Waymo Driver is being tested in Arizona, California, and Georgia.
Thus, the future auto industry will build the vehicle, but Waymo could provide the operating system. Similarly, Alphabet (NASDAQ: GOOGL) provides the Android operating system while companies such as Samsung or Foxconn build the phones.
In that environment, Fiat-Chrysler/PSA will provide manufacturing services to companies such as Waymo, Apple (NASDAQ: AAPL), and possibly Uber (NASDAQ: UBER). Importantly, Fiat-Chrysler builds Waymo’s signature autonomous vehicle the Chrysler Pacifica minivan.
The Future of Fiat-Chrysler
I think PSA/Fiat Chrysler’s future is to build autonomous vehicles for different markets. PSA could build a self-driving Vauxhall in the UK; for example, and an autonomous Peugeot or Citreon in France.
Far better sellers will be autonomous Chrysler Pacifica vans, Ram pickup trucks, Ram Promaster Vans, and self-driving Jeep SUVs. There could be a huge market for autonomous Ram vans; because companies such as Amazon (NASDAQ: AMZN) will use them for delivery.
Notably, Jeff Bezos claims Amazon could buy to 100,000 Rivian electric vans for Prime delivery, MultiChannelMerchant reports. Hence, there could be a huge market for electric Ram Promaster and Promaster City vans.
Beyond delivery I think will be a huge demand for self-driving rideshare vehicles and taxis. Importantly, Waymo is using Chrysler Pacifica vans for its Waymo One rideshare test in Arizona.
Is Fiat Chrysler a Value Investment?
I think Fiat Chrysler (NYSE: FCAU) could be a value investment with, or without the PSA Group.
In particular, the Ram is the second bestselling pickup truck in the United States. In detail, Chrysler sold 461,115 Ram Pickups between January and September 2019, Statista estimates. Thus, Ram outsold the Chevy, Toyota, and GMC pickups.
For example, General Motors (NYSE: GM) sold 412,258 Chevrolet Silverados and 163,603 GMC Sierras in the first three quarters of 2019. Meanwhile, Toyota (NYSE: TM) sold 187,622 Tacoma pickups and 86,062 Tundra pickups in the same period.
The best-selling pickup in America; however, is still the Ford F-Series. Ford (NYSE: F) sold 662,574 F-Series pickups between January and September 2019.
Impressively, Business Insider ranked the Ram as the second bestselling vehicle in America in June 2019. Thus, Fiat Chrysler controls a healthy share of the US auto market. Notably, pickup trucks are now the family car in Middle America.
Fiat Chrysler Prospers in Middle America
Conversely, Fiat-Chrysler has work to do in the sport-utility vehicle (SUV) department. For instance, AutoNXT ranks three Jeep models; the Grand Cherokee, the Cherokee, and the Jeep Wrangler among America’s top-ten selling SUVs.
In detail, those models are the Jeep Grand Cherokee; with 123,272 in sales in the first half of 2019, the Jeep Wrangler with 116,985 sales in the first half of 2019, and the Jeep Cherokee with sales of 97,210 in the first half of 2019.
Hence, Fiat-Chrysler achieves impressive sales in North America in the vehicles that real Americans love to drive. Therefore, Fiat-Chrysler is a serious player in the North American auto market.
Fiat-Chrysler and PSA could leverage that position to become major players in autonomous vehicles and electric vehicles. For instance, Fiat-Chrysler can use the profits from pickups to finance the creation of a self-driving electric SUV both Jeep and Peugeot could sell.
Is Fiat-Chrysler a Value stock?
Fiat Chrysler Automobiles (NYSE: FCAU) has value potential because of its low stock price, huge US auto sales, and large amounts of cash. For instance, Mr. Market was paying $14.979 for FCAU shares on 24 December 2019.
Plus, I think PSA could add some value to Fiat Chrysler. Hence, I consider Fiat-Chrysler a value investment even though it pays no regular dividend. Moreover, I think the alliance with Waymo adds a lot of value to Fiat Chrysler.
To explain, Fiat-Chrysler has all the money, brainpower, and technology of Google on its side. Thus, Fiat-Chrysler could become a major player in autonomous vehicles through Waymo and the Waymo Driver. In particular, Fiat-Chrysler could make a lot of money if the Waymo Driver becomes the standard operating system for self-driving vehicles.
If you are looking for a value investment in automobiles that could profit from autonomous driving technology, Fiat-Chrysler could be a good choice. Fiat-Chrysler has a lot of value, and PSA could add far more value to this legendary automaker.