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Jefferies’ Philippe Houchois believes Fiat Chrysler Automobiles NV (NYSE: FCAU) offers “an interesting high risk/reward mix of product-related self-help, high equity leverage and strategic optionality as management continues to explore ways to reduce capital intensity and optimise returns, including through M&A.”
Houchois initiated coverage of the company with a Buy rating and price target of €7.5.
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Valuation Opportunity
The analyst believes there is a market perception that with Ferrari having become independent, Fiat Chrysler has run out of options to deleverage.
However, Houchois believes leverage is more of a valuation opportunity for the company, with further valuation support likely from the various cooperation and consolidation agreements to reduce capital intensity and duplication.
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Capital Allocation
Given that capital allocation has been a “constant theme” for both Fiat and Fiat Chrysler, Houchois mentioned that the company’s strategy to “refocus existing NAFTA capacity on SUVs and cross-overs and away from cars may come across as a gamble on permanent low oil prices but is also consistent with market trends towards larger vehicles.”
The company is seeking outsourcing arrangements with additional OEMs to sustain a sales presence in cars, although margins are expected to be low though not worse that a negative contribution from cars.
Positive Shift
The analyst expects the shift to start positively impacting margins in mid-2017.
In addition, the company is set to ramp three important products during 2016, with Pacifica replacing the old Chrysler Town & Country, Levante positioning Maserati in the high-end SUV segment and further investment in the Alfa Romeo Giulia, following the success of the brand.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.