How Can Fiat Chrysler Create Value?

In a report issued Thursday, Deutsche Bank analysts Rod Lache and and Tim Rokossa reassumed coverage of Fiat Chrysler Automobiles NV (NYSE: FCAU) with a Hold rating (based on valuation) and 12-month target of €12.50.

The analysts note that, since the combination of Fiat and Chrysler, consummated in 2009, the company’s performance has been “impressive.” In fact, Chrysler is close to achieving its 5-year targets.

In spite of this growth and the company’s exposure to auspicious conditions in North America (from where it derives 60 percent of sales and 70 percent of earnings), the experts add, Fiat Chrysler continues to lag its competitors in terms of profitability, free cash flow and returns. Furthermore, Lache and Rokossa believe that “several of the factors that supported FCA’s strong performance up until now are likely to moderate.”

Having said this, the analysts also expect management to continue to strive for value creation. Looking to enhance the company’s return/valuation profile, FCA’s executives “are actively targeting aggressive and unconventional opportunities to generate value” including the sale of highly valued assets like Ferrari, a push for “aggressive growth for underleveraged brands,” and the identification of upside/synergies opportunities from M&A.

This approach, the analysts say, place FCA at a unique position in the industry. “While Automakers face diminishing cyclical tailwinds, FCA may achieve strong non-cyclical growth,” they explain. However, it should be noted that most of these initiatives will likely materialize several years from now.