Fiat Chrysler in low drive

August 19, 2016 09:00 AM
While oil prices may be down, not all consumers are taking advantage of automobiles this summer.

While oil prices may be down, not all consumers are taking advantage of automobiles this summer. Fiat Chrysler Automobiles N.V., (FCAU) a designer, manufacturer and distributor of automobiles, componentry and production systems is driving its way to a short position. The company operates via six segments: NAFTA, LATAM, APAC, EMEA, Maserati and Components, producing passenger cars, light trucks and light commercial vehicles under brands Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram. 

Its component segment produces lighting, body, suspension, molding, electronic, exhaust, powertrain and various parts under its Magneti Marelli brand, iron systems for its Teksid brand, and industrial automation systems under its Comau brand. 

Founded in 1899, the company has sizable interests in media and publishing. Based in London, this global company is currently operating in more than 150 countries and has three recent factors, combined with a preexisting technical downward trend, placing it on the short list. These include Brexit, debt exposure of Fiat Chrysler Automotive and the current media bias and customer uncertainty due to the untimely death of the mega movie franchise Star Trek actor Anton Yelchin. The Brexit’s inherent volatility has caused an increase in the company’s own stock risk, which simply places the equity in a cautionary state for investors in tandem with an already slow demand in the European market for automotive purchases. Such apparent weakness in its operating cash flow, which currently is contrasted with its increase in earnings per share, some believe suggests growth is outweighed by the lengthy macro picture of the company. While Jeep and Ram sales have posted a 17% sales increase in June — the highest for the company in more than 10 years — there is heavy technical and fundamental data, which does not translate to a rebound. 

The unexpected death of Anton Yelchin in late June, whose Star Trek film’s July release will continue to highlight a 2015 unofficial recall of 1.1 million Jeeps, will potentially negate the optimism for Jeep sales in June, and will undoubtedly hang over the company’s star product line casting insecurity regarding safety amongst Jeep’s target market. Contrary to June analysts’ consensus of optimism for FCAU, taken all together, this third factor will only lead to a decline in its net income and projected revenue growth. 

While these are recent occurrences, what makes FCAU, which has an earnings-per-share of 0.53    and P/E ratio of 11.50, particularly vulnerable are the technicals (see “Out of gas,” below). Its position has already been in a progressive decline since December 2015, when it was trading 7.2% below its 20-day moving average and its respective 50- and 200-day simple moving averages. 

It rallied 33% from a February low below $6 but failed on a double-top in March and April. Since then, it has made a series of lower highs and lower lows, eventually taking out its February low this July. 

FCAU broke below its 50-day SMA in May, which served as resistance and subsequently failed to take out resistance at the 50-day SMA several times. This most recent downward gap from $7.10 to $6.10 presents an extremely difficult position for FCAU to fill, with only a reversal at a primary resistance of $6.50 to $6.90 and a secondary resistance at $7.20 able to change its technical outlook. FCAU appears to be in a downward spiral and is a definite short.

About the Author