With the shocking news over the weekend of the retirement Fiat Chrysler (FCAU) CEO Sergio Marchionne for health reasons, the auto industry loses one of its brightest minds.
Marchionne, also CEO of Ferrari and CNH, put Fiat and Chrysler together at a time when few in the global industry thought it was a good fit, and restored some luster to the company's brands. The spinoff of Ferrari at the beginning of 2016 was a particularly clever move, as it allowed for that famous brand to be valued as a luxury goods maker without the shackles of a mainstream carmaker.
So, the reigns of Fiat Chrysler are being given to Mike Manley, the head of FCAU's Jeep and Ram brands. Ferrari goes to Louis Camilleri, a board member but one with no automotive operating experience, and Suzanne Heywood takes over at equipment company CNH, known for its Case and New Holland brands.
I guess it's the ultimate tribute to Marchionne -- in the country that invented the concept -- that it will take three people to replace him, but Fiat Chrysler now faces a deep existential crisis.
The future of the automotive industry, in the sense of unit volume growth, lies in the growth of the middle class in China and other emerging Asian economies. From a technological sense, the future lies in the shift in powertrains toward electrification and the development of mobility-as-a- service (MaaS), which is the commercial goal for autonomous vehicles (AVs). None of the Fiat Chrysler brands is a leader in any of those categories, although I will give Ferrari points for success in greater China.
In June, Marchionne announced plans to invest 9 billion euros on a broad powertrain electrification effort, but I don't believe the value in FCAU lies in trying to produce electric cars. Also, while the Jeep brand is quite valuable in the West, at that same June presentation Marchionne was quoted as saying "China is more difficult to solve for Jeep than Europe," while noting that locally produced Jeep sales had fallen 40% in the Chinese market during the first trimester of 2018.
So, from a global perspective, Fiat Chrysler risks dropping into the third tier of automakers with the likes of Peugeot, Mazda (MZDAY) and possibly Ford (F) . Those companies simply don't have the capital to deal with a world of battery electric vehicles (BEVs) and AVs.
I don't think Fiat Chrysler does, either, and I think they should sell the Jeep brand. With the Agnelli family's holding company EXOR still in effective control of the company and with third-generation family member John Elkann taking the Chairmanship of Fiat and Ferrari, it's a good time to make a move.
FCAU shares were trading at about 5.5x analyst consensus expectations for 2019 earnings per share on Friday, and opened lower Monday morning. However, I have spent the past quarter century learning that the appropriate response to such a low valuation number for a car stock is "so what."
This is a terrible time in the economic cycle in the West to own auto stocks; you just don't buy them once sales have hit a cyclical peak. Throw in the mild disagreements between the U.S. and European Union (and the U.S. and China, of course) on trade, and this is just not an attractive sector.
Only the promise of BEVs and AVs can drive any interest in the sector, but even Softbank's (SFTBY) investment in General Motors' (GM) self-driving car Cruise division -- a landmark move and pure proof of concept -- can't get GM's shares above $40.
Tesla (TSLA) is, of course an outlier, but this weekend's news that Elon Musk's company is apparently trying to retroactively borrow money from its suppliers shows that even techy car companies can be desperate.
So, I would advise you to wait for the next crisis to buy FCAU. Without Marchionne around, management becomes a minus not a plus -- at least for the time being -- and, as mentioned above and as every Ford shareholder knows, low P/Es alone are not reason enough to own auto stocks.
