Taking Stock by Malcolm Berko

Fiat and Ferrari Share History, but Not Expectations

Dear Mr. Berko: I bought 350 shares of Fiat Chrysler Automobiles for my IRA around Thanksgiving in 2012, and I paid under $3. I have 35 shares of Ferrari, and I don’t remember buying the stock, but my new broker tells me I got the Ferrari stock from a merger with Fiat Chrysler. It’s trading at $127 and is worth $4,445, which is more than the $1,100 I paid for Fiat Chrysler.

Several times, when asking my broker what I should do with these two stocks, he said he didn’t recommend them to me so he can’t give me advice on them. Please tell me what to do with these two stocks. -- L.B., Rochester, Minn.

Dear L.B.: Your broker should have himself legally declared a cockroach.

Ferrari N.V. (RACE-$136), a spinoff from Fiat Chrysler Automobiles (FCAU-$15.37), came public in October of 2015, selling 20 percent of its shares at $52. In January of 2016, FCAU distributed the remaining 80 percent of its RACE stock to Fiat Chrysler shareholders: one share of RACE for every 10 shares of FCAU. Your 350 shares of FCAU entitled you to a tax-free spinoff of 35 shares of RACE. Wow!

FCAU is a $110 billion revenue corporation with headquarters in London. It makes passenger cars, trucks and light commercial vehicles under the Jeep, Ram, Chrysler and Fiat names. FCAU also makes and sells the Maserati and Alfa Romeo. And 2018 revenues also include income from auto components such as engine control units, suspensions, shock absorbers, cylinder heads, electronic systems, transmissions, gear boxes and related equipment.

I like the company, but I wonder about the skills and experience of FCAU’s CEO, who’s 43 and rather young to be running a multibillion-dollar company. His name is John Elkann. He’s the scion of Gianni Agnelli, the glamorous Italian playboy and industrialist whose daddy (Giovanni) founded FIAT. FIAT is an acronym for Fabbrica Italiana Automobili Torino (or Fix It Again Tony).

Keep FCAU. I think it can return to its $24 high in the coming dozen months. Revenues for 2019 should be flat. However, earnings of $3.25 a share should exceed last year’s earnings of $2.12. And because management is in the process of shifting production to more pickups and SUVs, earnings for 2020 could come in at $3.60 on a 2 percent increase in revenues to $113 billion.

The improvement has little to do with Master John’s management skills, rather from a seasoned coterie of automobile executives with years of skinned knees and bleeding knuckles. Profit gains should derive from the sale of higher-margin vehicles, cost efficiencies, improved automation, significant debt reduction that reduces interest costs and the flexibility of a greatly improved balance sheet. I note that Standard & Poor’s, Reuters and Morningstar have buy recommendations on FACU.

RACE is the maker of high-visibility, high-speed and high-end sports cars that exceed 200 mph on most neighborhood streets and highways, providing there are no baby carriages, bicycles or seniors over 80 in the way. But a poorly planned product mix has hurt operating income as sales of lower-margin models like the V-8 Portofino grew much faster than those of higher-margin cars, such as the LaFerrari Aperta, priced between $2.1 to $3.9 million. The Aperta has a top speed of 220 mph, generates over 900 horsepower with a 6.3-liter engine displacement.

This sales mix, including a 12 percent drop in engine sales to Maserati, is likely to affect margins for the remainder of 2019 and perhaps 2020. Still, RACE’s revenues may exceed $4 billion this year, and income should improve meagerly to $4 a share. Though net profit margins are expected to decline, as may Return on Capital and Return on Share Equity, 41 of the Street’s 44 analysts covering RACE have a buy recommendation. Frankly, I think RACE should be sold.

(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.)