Why Fiat Chrysler Can Speed Ahead of the Pack

While shares of global auto makers have taken a tumble in the recent weeks, one team of analysts on the Street highlights London-based Fiat Chrysler Automobiles NV (FCAU) as a value play among the turmoil. While the car company has seen its stock fall sharply on the sudden death of its Chief Executive Officer (CEO) Sergio Marchionne, it has more than tripled over the past five years. Now, some analysts see the stock rising at least 50% under its new leadership, as outlined in a recent Barron's story

Fiat Chrysler to Rise 57%, Remain Cheaper Than Ford

Company 5-Year Stock Performance 
Fiat Chrysler 250%
General Motors 2%
Ford 43%
S&P 500 69%

On Wednesday, Fiat Chrysler posted second-quarter results in which earnings fell short of the Street's forecasts, adding to concerns over the passing of its CEO, who took over the company in 2003 and led the buyout of Chrysler in 2009. The stock closed down 12%, far more of a burn than General Motors' (GM) 4% decline on the day following its report and Ford Motor Co.'s (F) 6% loss. (For more, see also: Top 7 Companies Owned by Fiat Chrysler.)

When Marchionne took over the auto maker, it had just posted a yearly loss of $7 billion. By 2005, Fiat swung back to a profit, thanks to a deal with GM, widespread layoffs, production efficiencies and a revived product lineup. Over his tenure, the late auto exec increased his company's value by more than 10-fold, and focused on restructuring and separating assets. In 2015, Fiat Chrysler sold off supercar-maker Ferrari NV. 

On the back of the earnings report, UBS analyst Patrick Hummel upgraded the Italy-traded shares to "buy" from "neutral." His 12-month price target of $27 reflects a near 58% upside, and still implies a more humbly valued company than rivals like Ford, relative to earnings, as reported by Barron's. 

Fiat Chrysler, which has Italian roots dating back to 1899, generates a large portion of its revenues from the U.S. and manufactures heavily in Mexico. Over the years, it has relied more on large U.S. vehicles like Jeeps and Ram trucks for its top line, although it is well known for its smaller cars. The firm's new CEO Mike Manley indicated on the earnings call that the firm has "all of the resources we need" to reach an EBIT target of 14.5 billion euros at the midpoint by 2022, up from just 7 billion euros in 2017. (For more, see also: Auto Delivers Unimpressive January Sales.)

UBS noted various upside drivers including a reduction in Chinese auto tariffs effective July 1, resolved production delays of the redesigned Ram pickup, improving free cash flow, and continued demand for the Jeep Wrangler and Cherokee. 

It's important to note that an economic recession, forecasted by many experts to start within the next one to two years, would drag down the U.S. market after a decade-long bull market. A potential global recession would inevitably hammer Fiat Chrysler's revenues, earnings and stock price. 

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