Jefferies Initiates Fiat Chrysler At Buy, Sees Potential For High Cash Return

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Jefferies’ Philippe Houchois believes Fiat Chrysler Automobiles NV 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.

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.

Related Link: Jefferies Initiates General Motors At Hold, Sees Limited Upside In Lieu Of 'Peak Cyclical Conditions'

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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Posted In: Analyst ColorLong IdeasInitiationAnalyst RatingsTrading IdeasJefferiesPhilippe Houchois
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