Barclays Downgrades Fiat Chrysler On Unexpected North American Weakness

Fiat Chrysler Automobiles NV FCAU exceeded expectations with its fourth-quarter sales and profits. But weakness in China and at home discouraged Street experts.

The Analyst

Barclays analyst Brian Johnson downgraded FCA from Overweight to Equal Weight and cut the price target from €18 ($20.40) to €15 ($17).

The Thesis

Barclays expected challenges in Europe, China and Latin America, but had hoped that strength in North American light truck sales would offset the overseas weakness, Johnson said in a Friday note.

“What we learned on the call is that there are limits to the margin expansion in NAFTA, which led to a lower ’18 YE cash position and forecast for 2019,” the analyst said.

Barclays attributed reduced earnings power in North America to product changeovers, overproduction of the new Jeep Wrangler, pricing pressures and rising costs, Johnson said. The latter may require a cost-reduction program not unlike the one undertaken by General Motors Company GM, he said.

“While FCA maintained that its 2020 goal (set by ex-CEO Sergio Marchionne) were still achievable, they would require a 40-percent year-over-year increase in EBIT, which is a stretch — making it likely that the targets will be revised downward,” according to Barclays.

The sell-side firm anticipates overhang from the aggressive targets for multiple quarters.