Fiat Chrysler Automobiles NV (FCAU) 2017 Outlook to Potentially Support Near-Term Earnings

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Morgan Stanley believes that the company may be in position to provide increased confidence in its near-term earnings outlook

Morgan Stanley weighed in on Fiat Chrysler Automobiles NV (NYSE:FCAU) in its recent note to clients and rated the stock as a top pick. The firm analyzed a variety of the most successful upcoming products under Fiat Chrysler banner in order to better assess the scale of hidden value through possible changes.

Based on the firm’s and HIS production forecasts, Adam Jonas of Morgan Stanley estimated “Jeep models will comprise 44% of FCA revenues in 2017 and that RAM, minivans, and Maserati models will make up another 28%. “Other” FCA models (e.g. Dodge, Chrysler, Alfa Romeo, Fiat) will provide 28% of revenues.” However, the analyst believes Jeep, Maserati, RAM, and Minivan models will generate €7,483 million of operating profit in 2017, while other FCA models would generate negative profits of €689 million.

Fiat Chrysler’s business infrastructure may directly impact the firm’s ability to handle legacy liabilities in longer term. Mr. Jonas highlighted that FCA had around 234,000 employees at the end of 2015 with more than 90,000 in each of Europe and North America, 45,000 in Latin America and close to 10,000 in Asia. The Ferrari maker is the largest private employer in Italy. “If FCA were to put 0.5 turns of leverage on the Jeep brand (which we estimate has nearly €6bn of EBITDA), this could provide the parent company with around €3bn, or enough to offer voluntary buyouts for as many as 20k or 30k employees,” believes Mr. Jonas.

Morgan Stanley views FCAU to be ideally positioned to deliver increased confidence in the near-term earnings guidance. If margins remain flat, EPS forecast for 2017 could increase by 5% to €1.88 from €1.80. The firm noted if NAFTA margins rise by 100 basis points in 2017 versus 2016 guidance, Fiat Chrysler’s implied EPS would reach €2.05, up 14%.

According to Mr. Jonas, Fiat Chrysler may leverage the most from low fuel economy standards. The company has very little exposure in China and is the closest to a pure-play on the United States light truck market. The firm expects FCA 2017 outlook to be likely very supportive of the near-term earnings trajectory.

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