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Vivek Kumar
Fiat Chrysler

Fiat Chrysler Automobiles’, an international automotive company, shares jumped over 12% in Milan on Tuesday after the car marker agreed to revise certain terms of their merger deal with its French partner Peugeot SA, with the world’s eighth-largest auto maker’s shareholders receiving a smaller cash payout but a stake in another business.

The Italian-American multinational corporation, FCA, said it has agreed to the amendments in order to address the liquidity impact on the automotive industry of the COVID-19 pandemic while preserving the economic value and fundamental balance of the original Combination Agreement.

The world’s eighth-largest automaker said the special dividend to be distributed by FCA to its shareholders before closing is set at EUR 2.9 billion (previously EUR 5.5 billion) while Groupe PSA’s 46% stake in Faurecia will be distributed to all Stellantis shareholders promptly after closing following approval by the Stellantis Board and shareholders.

As a result of these amendments, FCA’s and Groupe PSA’s respective shareholders will receive equal 23% shareholdings in Faurecia (capitalisation EUR 5.867 billion at market close, 14th September 2020), while their 50/50 ownership of Stellantis – a group that will now have EUR 2.6 billion more cash on its balance sheet – will remain unchanged.

Additionally, it has also been agreed that the Boards of both Groupe PSA and FCA will consider a potential distribution of €500 million to the shareholders of each company before closing or, alternatively, a distribution of €1 billion to be paid following the closing to all Stellantis shareholders, the company said.

In July FCA said that the terms of its alliance with Europe’s second-largest car manufacturer Peugeot SA had not changed after Il Sole 24 Ore newspaper reported that it is considering ways to cut a planned 5.5 billion euro ($6.2 billion) of special dividend distribution to its shareholders.

Fiat Chrysler’s shares jumped over 12% to EUR 11.21 on Tuesday; however, the stock is down about 16% so far this year. Also, the Peugeot SA shares rose about 5%to EUR 16.9850.

Fiat Chrysler stock forecast

Bank of America set a EUR 16.00 price objective on Fiat Chrysler Automobiles. The brokerage currently has a buy rating on the stock. UBS Group set a EUR 9.00 price objective and gave the company a neutral rating. Jefferies Financial Group set a EUR 9.50 price target and gave the company a buy rating.

The one listed on the U.S. stock exchange, nine analysts forecast the average price in 12 months at $12.16 with a high forecast of $19.00 and a low forecast of $9.50. The average price target represents a 1.93% increase from the last price of $11.93. From those nine equity analysts, three rated “Buy”, two rated “Hold” and one rated “Sell”, according to Tipranks.

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Analyst views

“Our base-case fair value estimate of EUR 29 per share assumes, thanks to coronavirus-induced factory and dealership closures, sales plunge 21% in 2020, rebounding slightly by 5% in 2021, and more normalized revenue by2023. We estimate 3% annualized growth in revenue during our Stage I forecast. Our base-case adjusted EBIT margin assumptions average 3.6% during our five-year forecast, including near break-even 2020 margin due to COVID-19,” said Richard Hilgert, senior equity analyst at Morningstar.

“Fiat Chrysler’s five-year business plan had an adjusted EBIT margin target of 9.0%-11.0% in 2022. However, our forecast terminates with a normalized sustainable midcycle adjusted EBIT margin assumption of 5.7%, 140 basis points above the 15-year historical median of 4.3% to reflect the dramatic turn around the company has experienced during the past five years,” Hilgert added.

Upside and Downside risks

Upside: 1) Global expansion of Jeep, Maserati, and Alfa Romeo strengthens average revenue per unit and improves economies of scale. 2) Leading share position in Brazil and presence in other developing markets enhance long-term top-line growth prospects. 3) On a relative-size balance sheet basis, Fiat Chrysler has one of the largest available liquidity positions of the global auto manufacturers, highlighted by Morningstar.

Downside: 1) The global auto industry suffers from overcapacity that increases pricing pressure, in turn limiting economic profits. 2) Fiat Chrysler’s workforce is highly unionized, a threat to profits if workers demand wage increases or refuse labor cuts. 3) In the event of a substantial volume downturn, industrial debt service would divert significant cash from reinvestment in the business.

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