BRISK SALES FOR CHRYSLER: ‘WE GOT SMART ON PRICING’ Brent Snavely
Wall Street tickled pink as CEO Sergio Marchionne delivers higher profit margins in Q2
“We thought Q2 would prove FCA couldn’t reach its 2015 targets. The score today: Sergio 1, the Doubters 0.”
Max Warburton, analyst at Bernstein Research
When Fiat Chrysler Automobiles reported second-quarter earnings, CEO Sergio Marchionne said the company more than doubled operating profit in North America because “we got smart on pricing.”
For years, Fiat Chrysler’s cross-town rivals have had profit margins in North America that were two or three times higher. But as Marchionne well knows, profit margins are about more than just bragging rights.
For an automaker, lower profit margins can cool off Wall Street investors and lead to lower stock prices and also smaller profitsharing checks for hourly workers.
But analysts this year say brisk sales of specific models, including the Ram 1500 Laramie Limited and its Dodge Challenger and Charger Hellcats, along with a steady increase in Jeep sales have boosted average transaction prices for Fiat Chrysler. The automaker also has cut back on less-profitable fleet sales, kept incentives under control and cut dealer discounts.
During the second quarter, Fiat Chrysler earned a pretax profit of $1.4 billion (1.3 billion euros) in North America. That’s more than double the $650 million (595 million euros) it earned during the same period a year ago.
Marchionne delivered on profit margin, too, during the second quarter. The company’s profit margin was 7.7% — up from 4.9% last year.
That’s still a far cry from Ford’s 11.1% or GM’s 10% profit margin, but it was enough to impress Wall Street and drove the company’s stock price to $16.23 per share at mid-day Friday, its highest price since late April.
The improvement came little more than six months after Marchionne promised Wall Street the company would improve its financial performance.
“Heading into these secondquarter results, we expected another modest NAFTA result, a tiny profit in Europe and massive Latin-American losses. We expected cash burn. We thought Q2 would prove FCA couldn’t reach its 2015 targets,” Bernstein Research analyst Max Warburton said in a research note. “The score today: Sergio 1, the Doubters 0.”
For years, whenever Marchionne was pressed to explain narrower profit margins than rivals he would point out that Fiat Chrysler is the smallest of the Detroit Three and sells fewer vehicles, absorbing the full costs of doing business but with less revenue.
Fiat Chrysler also was in far worse financial shape as it emerged from the recession in 2009 than either GM or Ford. It’s vehicle lineup was depleted and factories behind the times. That forced the automaker to spend more money on research and development and to invest more in upgrading plants just to compete with rivals.
Marchionne completed the corporate integration of Fiat and Chrysler last fall into a single automaker and listed its stock on the New York Stock Exchange. Marchionne said investors can now more easily compare the financial performance of the Detroit Three side by side.
When it came to profit margins, the comparisons were ugly.
“We get it,” Marchionne told Wall Street analysts in January. “So, we’ll come back to you. Give us the time.”
The company is continuing to sell more Jeep SUVs and Ram pickups, said Eric Lyman, vice president of industry insights for True Car.
That helps drive the company’s average transaction prices higher because, on average, Jeep and Ram models sell for higher prices than Chrysler, Dodge and Fiat.
“Those two brands make up to 59% of their sales in the U.S., and that is up from 54% last year,” Lyman said. “So they are selling a richer mix of more profitable vehicles.”
Fiat Chrysler also is keeping its incentives under control. Lyman said the automaker’s incentives have crept up about 1.8% this year, but final sales prices have increased more.
In July, the average transaction price of the Dodge brand was $30,381, an 8.8% increase compared with $27,911 a year ago, according to car shopping site Edmunds.com. The average transaction price of the Ram brand was $42,991 in July, a 4.5% increase. Those gains outpaced the industry’s 1.1% pricing increase during the same period.
In April, the automaker cut dealer discounts on wholesale pricing. Dealers now pay 1% more for the Chrysler, Dodge, Jeep and Ram vehicles they sell, or about $200 more on a vehicle with a $20,000 invoice. That reduced the spread between the price dealers pay and the sticker price.
Fiat Chrysler CFO Richard Palmer said earlier this year that the company also is working to reduce the percentage of vehicles that dealers lease in some segments. He said the automaker is trying to reduce vehicles it sends to rental fleets and increase the number to commercial customers. Automakers typically get higher prices on fleet sales to companies than to daily rental companies, such as Avis and Hertz.