Why Fiat Chrysler Has Wall Street Going Full Throttle

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Fiat ChryslerLast year's debut of the brand-building Dodge Challenger SRT Hellcat was just one of a slew of planned moves to remake FCA's brand portfolio.
Shares of Fiat Chrysler (FCAU) have risen more than 60 percent since its debut (at a price of $9) on the New York Stock Exchange last October. That growth has far outpaced the market -- not to mention that of all of Fiat Chrysler's rivals over the same period. Why have investors rushed to grab shares of this long-struggling automaker?

The Core of FCA's Plan: Big Expansions for Its Key Brands

There are a few factors driving the big rise in FCA's share price. Here's a big one: FCA is taking big steps to win sales growth around the world. In May of last year, CEO Sergio Marchionne and his senior team presented their five-year plan for the automaker. The key points included:
  • Taking Jeep global. FCA's plans to boost sales of its storied SUV brand in Europe, South America, and China got underway with the launch of the all-new Renegade, a small entry-level Jeep intended to draw new buyers to the brand. Jeep sold about 732,000 vehicles in 2013, most of those in the U.S. FCA expects that Jeep's expansion into global markets will more than double its sales to 1.9 million Jeeps in 2018.
  • Relaunching Alfa Romeo. FCA is spending $2 billion on a new generation of Alfa Romeos, with the hope of capturing a significant slice of the global premium-car market by 2018. Several new Alfa sedans and SUVs are planned, with the first set to arrive by the end of this year. In terms of price, size, and features, they'll be aimed at BMW's (BAMXF) 3 Series and 5 Series sedans (and the corresponding X3 and X5 SUVs). Sales aren't expected to be anywhere near the 1.8 million BMWs sold last year, but FCA thinks its can ramp up to about 400,000 Alfa Romeo sales a year by 2018.
  • Big changes for Dodge and Chrysler. FCA's Ram and Jeep brands will stay on their familiar courses in the U.S., but last year FCA began the process of shaking up its Dodge and Chrysler brands. Dodge has been refocused on "performance cars" (and SUVs) in a bid to draw younger buyers to FCA showrooms, starting with the insane 707-horsepower "Hellcat" versions of the Charger and Challenger introduced last year. Meanwhile, Chrysler will chase mainstream buyers with a line of cars and crossover SUVs, as well as a new version of the Town & Country minivan due next year. The plan is that Chrysler brand sales will roughly double by 2018, while Dodge's will hold steady.
FCA's five-year plan is ambitious -- some would even say audacious. But even if some of the initiatives fall short of Marchionne's aggressive sales goals, it's clear that FCA is on track for significant sales growth over the next few years. But there's more to the story.

A Financial Tune-Up Includes Spinoff of FCA's Most-Storied Brand

Here's a big development that has gotten Wall Street attention: FCA plans to spin off its Ferrari subsidiary later this year.

FCA plans to offer 10 percent of Ferrari in an initial public offering. The remainder will be distributed to existing FCA shareholders. That alone may have enticed some investors to buy FCA's stock: Ferrari is a brand with tremendous global appeal and profit potential. The shares given to FCA shareholders could turn out to be bargains.

FCA's plan to spin off Ferrari is in part a fund-raising move: Proceeds from the shares offered in the IPO will help FCA reduce and restructure its debt. That's just one of the steps that FCA is taking to reduce its debt load -- and that is a key factor attracting savvy investors.

Those steps have included issuing additional shares of FCA common stock and offering a series of bonds convertible to stock. Together with the proceeds FCA expects from Ferrari's IPO, it should be enough to reduce FCA's net debt by half -- to about 5 billion euros -- by next year.

An Ambitious Remaking Is Drawing Investors

If you add up FCA's aggressive global expansion plans with its prudent debt-reduction moves -- and throw in a dash of Ferrari romance -- you'll understand why investors are flocking to the Italian-American automaker.

But there's still some big risk: For FCA's growth strategies to pan out, the company has to deliver top-notch products that draw eager buyers, particularly with the Alfa Romeo effort.

Delivering top-notch products has sometimes been a challenge for the former Fiat and Chrysler. But for these plans to work out, the company's products have to be great.

Great new cars aren't all FCA needs -- but without them, the rest of the plan will be on shaky ground.

Motley Fool contributor John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Find out the easy way for investors to ride the new mega-trend in the automotive industry in our free report.​
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