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Fiat money

30 January 2013 By Antony Currie

Chrysler’s bumper performance last year confirms that Fiat’s valuation of the business looks pretty stingy. Earlier this month the Italian automaker, which owns 58.5 percent of its American peer and has management control, offered $198 million to buy another 3.3 percent stake from the union healthcare trust that owns the rest of the company. That implied Chrysler is worth $6 billion. But the Motown manufacturer earned $1.7 billion last year, beating its executives’ own profit forecast by 13 percent. That suggests Chrysler is worth a lot more than Fiat is offering.

Sure, the company’s financial performance is nowhere near as good as that of its Detroit rivals. Ford cranked out a 10.4 percent pre-tax margin last year in North America, where Chrysler has most of its business. General Motors, due to report its numbers on Feb. 14, has been besting 8 percent of late. Chrysler eked out just 3 percent. Interest payments sucked up $1 billion, but even stripping that out, the operating margin was only a modest 4.4 percent.

Moreover, Chrysler’s introduction of the Dodge Dart last year and the introduction of the Fiat 500 to the U.S. market in 2011 didn’t go so well. It has pushed back selling a couple of new Jeep models until 2014. And it has had to downshift some estimates from its 2009 business plan. Notably it expects free cash flow in 2014 to be closer to $1 billion than the original, ambitious $3 billion target. But that’s largely because Chief Executive Sergio Marchionne is investing in new products.

All this means a publicly traded Chrysler would not be worth the same nine times multiple of estimated earnings for 2013 that investors attach to Ford. But the firm’s top line is growing, it’s a purer play on the U.S. recovery than its rivals, and it relies for a greater chunk of its revenue on pickup trucks, which are regaining popularity as the housing market improves.

Chop a hefty 40 percent off Ford’s market multiple, and Chrysler would be worth 5.5 times the $2.2 billion Marchionne expects it to earn this year, or just over $12 billion. Fiat argues that its proposal follows the 2009 deal regulating how to value any stake sales – something the union trust disputes. What’s clear, though, is that the offer lowballs the car maker’s real value.


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