Fiat Chrysler Automobiles (FCAU, Financial) reported its third quarter results on October 29, and left analysts’ agape on its future strategies while it missed their estimates. Nevertheless, as the results were out before the bell on Wednesday, it sent the stock soaring higher, thanks to the biggest news announced from the horse’s mouth – the spinoff of Ferrari through an IPO by the end of the year. Let’s check into the automaker’s financial playbook to find out the key highlights of the third quarter that could be worth mentioning.
A quick quarter glance
The world’s seventh-largest aut maker earned 188 million euros ($239 million) in the third quarter, about 1 million euros less than it earned in the year-ago quarter. Profits were mainly driven by sales in North America and Asia-Pacific. In North America, the company earned 549 million euros ($700 million) before interest and taxes, 13 million euros ($17 million) increase from the third quarter of the previous year. In Asia Pacific, the company earned 169 million euros ($215 million), up 70 million euros ($89.2 million) from a year back.
FCA CEO Sergio Marchionne stated that the earnings were a “decent set of results” that puts the newly merged automaker on track to deliver its full-year targets that include a profit of 600 million euros ($763 million) to 800 million euros ($1.2 billion) in the fiscal year.
Luxury brands have done well
The company has two main luxury brands for which it reports results separately from its regional results.
Ferrari earned 89 million euros this quarter, only an inch up from 88 million euros reported a year back. Worldwide shipments were up by 8%, with an 81% whopping increase noticed in the Asia Pacific region which more than offset a 14% decline in the U.S.
Another luxury brand, Maserati, earned 90 million euros on revenue of 652 million euros, a huge increase from 43 million euros and 444 million euros, reported a year earlier.
U.S. sales are getting dented
The increase in earnings in the U.S. during the quarter was by a narrow margin of 2%, but this improvement in earnings could have been higher. The company had to shell out an extra $250 million during the quarter to cover warranty costs and repairs to recalled vehicles – something that pinched its margins by a couple of percentage points.
FCA’s CFO Richard Palmer said that pretax margins in the U.S. were around 4% but could have been around 6% if there weren’t added recall and warranty costs. This pain continues for Chrysler, which has already recalled more than 5.1 million vehicles in the current fiscal year.
It is important to note that the quality issues of Chrysler have been mounting as the head of quality of Fiat Chrysler in the U.S. left the company a week back. This was just a day after the automaker’s brands landed at the bottom of the heap of Consumer Reports’ influential reliability study.
Ready to spin off the crown jewel
As the newly merged Italian-U.S. automaker, Fiat Chrysler, seemed fine with spinning off exotic car brand Ferrari by early next year, the share price of the newly listed company soared nearly 18%after the news flew in. The company has mentioned to offer up to 100 million shares of stock in the NYSE by end of the year.
This action would be to raise capital for an ambitious five-year growth plan to dramatically increase sales from 4.4 million vehicles to 7 million vehicles by 2018.
“The board supports management's determination that this transaction represents FCA's best course of action to support the long-term success of the group while at the same time substantially strengthening FCA's capital base,” stated the CEO of the group after the decision of spinning off Ferrari came into limelight.
The company has shared that 10% of Ferrari’s shares would be sold in an IPO, while 80% of them would be offered to the existing Fiat Chrysler stockholders. The remaining 10% would be solely owned by Piero Lardi Ferrari, the second and only living son of founder Enzo Ferrari.
Last word
With the spinoff of Ferrari, investors will be able to value each company more than expected. The CEO puts it this way, “This was an act of purification on our side. It was one more step … in a long journey that started in 2004.” The vehicle recalls could be a temporary problem to lift profits in the short run, but, as the company is devising strategies to raise money from the market, investors should not worry much and hold to their investments for the time being.
