Chrysler Gets It Done

No surprise to those who've been paying attention to the sales charts: Chrysler Group LLC, the smallest -- and for a long time, the most fragile -- of the three Detroit automakers, posted a net income of $473 million for the first quarter, a 308% increase from its year-ago total.

That's a big number, one that helped drive corporate parent Fiat (OTC: FIATY) to 866 million euros ($1.14 billion) in pre-tax earnings (what Fiat calls "trading profit") for the quarter, well ahead of the 828 million euros called for in analyst estimates.

That's a good quarter for the mashed-up automaker, which has overcome big challenges with strong U.S. sales in the last year. But while Chrysler's success has been a surprisingly good story, the company still faces significant challenges.

At the moment, Chrysler is Fiat's engine
About $740 million of Fiat's $1.14 billion trading profit was attributable to Chrysler, as ongoing weakness in Fiat's European operation was once again more than offset by Chrysler's continued resurgence in the United States. Like key European-market rivals Ford (NYS: F) and General Motors' (NYS: GM) Opel unit, Fiat's first-quarter sales in Europe were down significantly over year-ago numbers -- a sobering 20%, in the Italian automaker's case.

Meanwhile, Chrysler has continued to gather strength in its own home market. Chrysler's U.S. retail sales were up 40% in the first quarter, driven by strength across the board:

  • Chrysler sedans, the midsize 200 and flagship 300, posted huge gains during the quarter. Like most of the Chrysler Group's products, these two sedans were recently refreshed, and the resulting cars have been surprisingly competitive. March was the 200's best ever sales month, and its retail sales were up 271% versus the year-ago quarter.

  • Dodge and Ram brands -- Chrysler's bread-and-butter cars, SUVs, and pickups -- all posted big increases. The Challenger coupe and Journey crossover both set monthly sales records in March, and the Grand Caravan minivan had its best March in four years.

  • Jeep has now posted 23 consecutive months of year-over-year sales gains. Sales of the revamped Grand Cherokee have been particularly strong; last month was the vehicle's best March since 2006, and sales during the quarter were up 44% versus the year-ago period.

Significantly, Chrysler is selling quite a few more cars (versus trucks and SUVs) than it was in the first quarter of 2011. Like its Detroit rivals, but perhaps to an even greater extent, Chrysler was long dependent on sales of its SUVs, pickups, and minivans -- and its revenues were hurt badly when gas prices rose and sales of large, thirsty vehicles dropped off.

Gas prices have been rising lately, and consumers have been seeking more fuel-efficient options, but this time around Chrysler has decent products to offer them, with more on the way. Car sales represented just 22.2% of Chrysler's total sales in the first quarter of 2011, a percentage that increased to 30.2% this past quarter. And it's likely to go up further in coming quarters, as the new Dodge Dart compact arrives at dealers over the next couple of months -- a much-needed model for Chrysler, and one that looks to be solidly competitive.

What's ahead for Chrysler and Fiat
When Fiat first took control of Chrysler in the wake of the economic crisis, CEO Sergio Marchionne set in motion a high-speed program to remake Chrysler's dated, uncompetitive product line on the fly. That effort has proven wildly successful, as the company's old products were given new life, and new competitiveness, with subtle restyling, improved handling, and upgraded interiors.

Chrysler is managing its sales growth quite well, with dealer inventories at a respectable 59 days' supply as of the end of the quarter. And while Chrysler's incentives continue to be high relative to most competitors -- only GM's are in the same range in a typical month -- its transaction prices are improving, up about $100 per vehicle versus this time last year.

The key challenge for Chrysler in coming months will be to sustain and expand on its sales momentum. The launch of the new Dodge Dart is critical, as high gas prices have driven strong demand for smaller vehicles, and Chrysler arguably hasn't had a competitive entry in this segment since the original Neon in the mid-1990s. Chrysler's efforts to expand overseas -- under its own brands, and by offering several of its products under Fiat's Lancia brand -- are key to creating the economies of scale needed to fund competitive product-development programs, including hybrids, where the company lags far behind green leaders Ford and Toyota (NYS: TM) .

Meanwhile, Fiat will likely continue to struggle as the European auto market continues to suffer -- and particularly at home, as car sales in Fiat's traditional stronghold of Italy have been down sharply in recent months. But for the time being, it looks like Chrysler can shoulder the load.

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At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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