Fiat Chrysler Cashes In On $7 Billion Auto Parts Sale On Monday

Fiat Chrysler Automobiles (FCAU) investors cashed in on Monday after the company announced a $7.1 billion sale of Italian parts maker Magneti Marelli to Japanese-based and KKR-backed Calsonic Kansei (CLKNF) .

Shares of the automotive giant finished Monday's trading up 3.74% after paring down gains that put the stock up over 5% in early-morning trading. The stock closed at $16.09 per share, recovering from its lowest consecutive closes since August 2017 on Thursday and Friday of last week.

The move came amid optimism that the deal for the auto parts unit will fall in line with what Fiat Chrysler CEO Mike Manley calls the company's "relentless focus on value creation."

Dividend Possibility Provokes Analyst Optimism

The possibility has come to the front of analysts' minds in terms of shareholder value following the deal is a hefty dividend for investors.

"FCA today announced the sale of Magneti Marelli to Calsonic Kansei at €6.2 billion ($7.1 billion), the high end of market expectations which could give rise to a special dividend of circa €2 billion ($2.3 billion) in our view," Jefferies analyst Philippe Houchois wrote in a note on Monday morning.

The transaction and dividend possibility added to Houchois' bullishness on the stock, as he maintained a "buy" rating and $21 price target, stemming the tide of price-target lowering that has tempered his coverage since April. Fiat Chrysler has not paid a dividend since 2014.

Credit Concerns Curbed

The cash infusion is of course a positive for the balance sheet of the carmaker as it works toward improving its credit rating.

It also builds on momentum from a Moody's debt outlook upgrade in September.

"FCA's outlook change to positive reflects the continued improvements in its credit metrics since our last upgrade in March this year," Moody's Senior Vice President Falk Frey said of the upgrade. "In case these metrics can be sustained even in periods of weaker demand and rising headwinds from higher raw material prices, rising interest rates and tariff changes, this could result in an upgrade of FCA's ratings within the next 12-18."

To be sure, the ratings agency currently maintains a Ba2 speculative-grade rating on the company's €14.3 billion ($16.4 billion) in debt.

While that is up from a Ba3 rating in March of this year and a consistent B rating in recent years as debt ballooned to nearly €20 billion ($23 billion), Moody's still denotes a "substantial credit risk" to the company's large debt.

Cash for Compliance

The cash might help the company avoid another familiar pitfall in its environmental awareness issues.

"The transaction also materially de-risks the FCA's balance sheet ahead of planned reinvestment in emissions compliance," Houchois added.

The company's stock was noted as "one to avoid" by TheStreet earlier this year as a result of its troubles with emissions standards. Following the opening of investigations by American authorities in January and French authorities in March, the stock saw significant short-term slides.

Investors will be hoping that the increased cash infusion will be able to help the automaker assuage concerns over emissions standards as it invests in making its cars cleaner.

Self-Driving Spending?

Analysts were quick to point out that while self driving is the most promising of Fiat's initiatives in a secular sense, it is also not the most immediate need given the company's affluent ally in Alphabet (GOOGL) .

"For the time being, they're happy to leverage their relationship with Waymo," Evercore ISI Managing Director George Galliers told Real Money. "A stronger balance sheet is the first priority."

He noted that in Evercore's opinion, Waymo is ahead in the race to release self-driving cars first. In his power rankings, Waymo is in the top spot followed by General Motors' (GM) Cruise product, both of which outpace other competitors.

Given the leadership position, Galliers said he does not expect billions to flow to the effort from Fiat in the near term.

Instead, Galliers focused on the debt the company holds as a priority for the company to alleviate with the cash infusion.

He explained that the company has had to work its way out of significant debt in recent years, which left it behind competitors in spending ability. That memory will keep the balance sheet atop executive's minds.

"Before the second quarter this year, they had been in net industrial debt for many years," Galliers said. "Strengthening the balance sheet is number one."

Trouble Getting a Jump

Despite recovering from a slide last week, Real Money technical analyst Bruce Kamich noted that the company might not be out of the woods.

"Without any prior signs of accumulation (buying) I would not anticipate the rally to go very far," he said. "FCAU could try to stabilize around $15 but I suspect it could take many months before the stock is in a technical position to make a sustained rally."

He set a possible downside price target of $14.87, a nearly 10% decline from the current prices to its lowest close since August 2017.

Shares remain flat post-market as technically minded investors await more firm signs of either decline or ascent.

Source : https://realmoney.thestreet.com/articles/10/22/2018/fiat-chrysler-cashes-7-billion-auto-parts-sale-monday

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