Fiat Chrysler will need more cash to reach targets, analysts say

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Fiat Chrysler Automobiles will have trouble achieving ambitious targets set by CEO Sergio Marchionne’s new strategic plan, according to analysts, who say the automaker will likely need to raise more money, whether it be by issuing a bond or conducting a capital increase, for the plan to succeed.

"Much as we admire the ambition and think elements are achievable … it is hard to find conviction on the financing of the plan," Bernstein Research analyst Max Warburton said in a note to investors.

"Fiat is weighed down with huge debt, burdened by financing costs and is only thinly profitable. It's cost of capital is huge," Warburton said. The company "surely" needs a capital raise of some form for this plan to be affordable, he said.

Exane-BNP Paribas analyst Stuart Pearson said: "It's definitely a tall order, but I don't think we ever expected anything less from Marchionne in terms of the ambition. Even getting half or two-thirds of the way to those business plan targets would be a positive achievement industrially."

The company’s targets include boosting global vehicle sales to 7 million in 2018 from a goal of 4.4 million this year and more than doubling earnings before interest and taxes to as much as 9.8 billion euros.

Jeep 'a stretch'

The plan will focus on expanding the Jeep and Alfa Romeo brands, with Jeep's vehicle sales targeted to rise to 1.9 million vehicles by 2018 from 1 million this year and Alfa's volume seen at 400,000 vehicles in 2018 from 74,000 in 2013.

"The opportunity is clearly there, but 1.9 million Jeep units is a stretch," ISI Group analyst George Galliers said. The brokerage has forecast Jeep sales of 1.2 million in 2018.

Galliers said ISI has a hard time figuring out how Fiat Chrysler expects to increase sales in markets where growth is peaking -- such as in the United States -- or slowing down, which is the case in Brazil.

Analysts also said Marchionne's goal of paying off nearly all of the company's net industrial debt, which stood at 10 billion euros at the end of the first quarter, while spending 48 billion euros over the five years on the revamp would be challenging.

"Fiat's massive plan -- and the necessary capex (capital expenditure) and r&d -- simply do not look affordable or prudent to us," Bernstein's Warburton said in his note.

Independent analyst Maryann Keller said profits in North America, a recovering Europe and the strong Jeep brand make the plan achievable for Marchionne. "I think he can pull it off because he has Chrysler, and we're in a decent economy."

Marchionne told analysts attending Tuesday’s presentation that he was considering a mandatory convertible bond to raise more money for the plan. He said that Fiat Chrysler has no plans for a capital increase or to sell Ferrari, the carmaker’s most-prized asset.

Below expectations

Fiat Chrysler’s disappointing first-quarter results, which where also released Tuesday, are a reminder of the struggle the automaker has to overcome.

Fiat Chrysler posted a net loss of 319 million euros compared with a profit of 31 million euros for the same period last year despite a 12 percent rise in revenue to 22 billion euros. Trading profit, or operating profit excluding extraordinary items, fell 1 percent to 622 million euros.

A flat European market and weakness in Latin America offset growth in North America and Asia. The results were below what analysts had expected.

The "miss comes as a timely reminder of the downside risks associated with the plan," Exane BNP Paribas analyst Rabih Freiha said in a report.

"While extremely favorable market conditions (which we doubt) and flawless execution could allow Fiat to reach some of its operating targets … one figure that we believe even the bulls will have trouble justifying is the 2016–18e deleveraging (reduction of debt)," Freiha added.

The biggest drag on Fiat Chrysler has been the European market, where sales have been moribund for years and competition fierce. It has had to cut costs dramatically to end the cash burn, leaving plants in its home market of Italy idle for weeks at a time.

"The problem is powerpoint presentations are a lot easier than real life," said Harald Hendrikse, a London-based analyst with Nomura Holdings. "The world changes very slowly and you have brands at the bottom of the pile in many regions. It’s not going to happen overnight."

Jens Schattner, a Frankfurt-based automotive analyst at Macquarie Group, said: "If it was so easy just to launch new products to be successful in this industry, why wouldn’t everybody do exactly the same."

Reuters and Bloomberg contributed to this report

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