Marchionne enters final push to free Fiat Chrysler from debt

Bloomberg

Sergio Marchionne enters the final stretch of his career at Fiat Chrysler Automobiles NV with a daunting mission: prove wrong the doubters who question how he can make the carmaker’s $5.29 billion in debt disappear by the time he steps down in two years.
His strategy update will be a closely watched presentation next week at the Detroit motor show, particularly as Fiat Chrysler won’t be unveiling new models at the annual event. Marchionne knows his credibility is riding on his 2018 targets: the CEO is demanding signs of progress towards reaching them at every management meeting, according to people familiar with the sessions.
And the pressure is showing results. Fiat Chrysler’s executives have expressed increasing confidence at recent investor gatherings that they’ll reach their goals, according to the people, who asked not to be named citing private conversations.
Aiding Marchionne is a product shift to more profitable models such as Jeep sport utility vehicles and Dodge Ram pickup trucks instead of less popular sedans in the US The line-up provides a buffer as industry conditions turn challenging, with growth in the US and China topping out or slowing.
Investors have taken note: the stock listed in Milan has surged 64 percent since the carmaker raised its full-year forecast in late October, and analysts’ average share-price estimate has jumped 11 percent to 8.26 euros a share. The stock, which has been trading higher than that this year, rose as much as 5.4 percent to 9.75 euros on Friday, the highest intraday price since Aug. 11, 2015, and was up 5.1 percent as of 2:54 p.m.
“The mix shift in the US is huge and helps profits reach a level where they are able to start de-leveraging: that’s a game changer,” George Galliers, an analyst at Evercore ISI, said by phone. “There is a good chance that Fiat will be net cash break-even at the end of 2018, which is more than most investors expect, so that Marchionne could retire with a repaired balance sheet.” Galliers, who expects Fiat Chrysler to boost profit in North America through 2018 despite the weaker market, raised his recommendation on the stock to buy from sell in
November.
Fiat will probably go from having 4.7 billion euros of net debt at the end of 2016 to holding 3.2 billion euros of net cash at the end of 2018 thanks to its strategy shift, according to Goldman Sachs analyst Stefan Burgstaller, who on Friday said he’s adding Fiat to the firm’s list of favorite European stocks. The carmaker is likely to outline how it will reach the goals when it publishes last year’s figures at the end of this month, the people said. Fiat declined to comment. But even with Marchionne’s improved strategy, the vast majority of analysts still expect the manufacturer to fall short of the targets.
These include generating as much as 5.5 billion euros ($5.82 billion) in adjusted net income, almost three times the 2015 figure, and turning a projected 5 billion euros in net industrial debt into at least a 4 billion-euro cash pile. The company could miss the adjusted-net figure by 42 percent and carry over 3 billion euros of debt, according to analyst estimates compiled by Bloomberg.

TARGETS ‘FANTASYLAND’
Marchionne, 64, is no stranger to public skepticism. Critics of his lofty goals have called them “ fantasyland” and “ not credible.” The CEO himself backtracked a year ago, when he stopped promoting a goal of 7 million annual group deliveries by 2018, which compares with Fiat Chrysler’s 4.6 million vehicle sales in 2015. Deliveries could be largely flat at about 4.8 million vehicles annually this year and next, research company IHS Automotive estimated in November.
“The company is repairing its highly levered balance sheet, but its lack of cash flow versus peers,” including Toyota Motor Corp., General Motors Co. and Ford Motor Co. ,”remains a challenge for the credit profile,” said Joel Levington, a credit analyst at Bloomberg Intelligence. “Market exhaustion in North America, rising inventory and commodity levels may pressure pricing, which could create additional profit headwinds.”
Marchionne, who could discuss the carmaker’s progress as he meets reporters Jan. 9 at the North American International Auto Show in Detroit, is looking to achieve the 2018 profit and debt targets with higher-margin vehicles after scrapping the car-sales goal.