Fiat: A Bet on 2 Auto Recoveries

Fiat: A Bet on 2 Auto Recoveries

Until the collapse of General Motors and Chrysler, Fiat was just the Italian automaker that had left the U.S. decades ago. But as officials scrambled to save Chrysler, they found a willing buyer in Fiat. Today, Fiat represents a play on two automotive recoveries -- one for Chrysler, and one for Fiat itself.

The Chrysler recovery
Going into the crisis, Chrysler was in the least advantageous position of the Detroit Three automakers. With GM having a larger too-big-to-fail proposition and Ford not needing a court restructuring, Chrysler was in a tough spot.

Then Fiat discussed its support for a takeover of Chrysler, and after some intense negotiations, Fiat eventually walked away on the path to eventually acquire the 58.5% stake it has today.

This large stake in the American automaker gives Fiat major exposure to the risks and rewards of Chrysler. However, the improved cost structure created during the restructuring has made Chrysler more economical to manage.

A Fiat-Chrysler alliance has allowed the two automakers to share platforms to cut down on development costs. As part of the refresh of Chrysler's product line, the new Dodge Dart was launched. But to save on development costs, the Dart rests on Fiat's "compact wide" platform also used on the Alfa Romeo Gielietta, albeit slightly enlarged for the Dart.

Chrysler's recovery has a lot riding on the American market. Fortunately, this market is in need of a large number of new cars because of its record average age. Sales of heavy-duty work trucks that make up much of the Detroit Three's product lines are also tied to a recovery in construction, so a rebound in both commercial and home construction should be a driving force behind truck sales.

The Fiat recovery
Despite the green shoots in the North American market, the European market is still a loss generator for most automakers. This is a particular problem for European automakers dependent on this market.

German automaker Volkswagen has managed slow European sales by targeting its long-established North American business as well as undergoing major expansion in China. But Fiat, the automaker itself, doesn't have the same North American presence and only recently re-entered the Chinese market.

While both the North American and Chinese markets are likely to become a larger part of Fiat's sales in the future, European sales are still critical for Fiat.

Fortunately, there is light at the end of the tunnel for Europe. A report from Ernst & Young predicts a return to slight growth in Europe next year, in contrast to the current ongoing recession. Even though growth isn't expected to roar as it did in many places before the collapse, a upward trajectory is a positive for automakers that exist in a somewhat cyclical industry.

One stock, two recoveries
The Fiat-Chrysler deal has added opportunities to Fiat shares by giving investors exposure to both a North American and European auto recovery. In addition, the sharing of platforms between Fiat and Chrysler stands to benefit the alliance in the form of reduced costs and accelerated development times.

While some investors may choose to pick one recovery over the other, investors with a bullish perspective on both markets should see whether Fiat fits with their investment strategy.

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Alexander MacLennan has long January 2015 $40 calls on General Motors. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Ford and General Motors and owns shares of 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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