Breakingviews: U.S. strength gives Fiat Chrysler an M&A breather

Fiat Chrysler Automobiles’ strength in the United States gives it space for an M&A breather. The Jeep maker is weathering the downturn in the global car market better than many rivals. Record results at its all-important North American division helped it deliver better-than-expected operating profit in the second quarter. This gives boss Mike Manley room to cut costs while keeping an eye out for merger partners.

After a proposed union with French carmaker Renault collapsed last month, Fiat Chrysler is – at least for the moment – fending for itself in an increasingly tough market. Adjusted earnings before interest and tax were 1.5 billion euros in the three months to June, roughly the same as a year ago but better than analysts had forecast. While rivals Renault and Ford have been forced to cut financial targets, Manley is sticking to his promise to deliver adjusted EBIT above 6.7 billion euros this year. Fiat Chrysler shares rose 4% on Wednesday afternoon.

The $21 billion group’s relative strength rests on its North American operations. Operating profit for the region offset losses in Asia and at luxury brand Maserati, while Europe barely broke even. Manley, who took over from the late Sergio Marchionne a year ago, managed to compensate for a 12% fall in shipments by cutting costs and hiking prices.

There are challenges ahead. Consultants J.D. Power and LMC Automotive predict U.S. new vehicle sales will drop 2% in July. And Fiat Chrysler’s high-margin hybrid Jeep Renegade and Jeep Compass sports utility vehicle models will not hit the road until 2020, along with an electric version of the smaller Fiat 500.

Yet, the Italian-American group’s Jeep and Ram brands are still popular in the United States and are relatively insulated from the trade war with China. Manley expects the strength to continue, and sees regional EBIT margins approaching a healthy 10%. This, combined with more cost savings in Europe, should tide Fiat Chrysler over until next year, when the new models kick in.

There is another advantage. While the talks with Renault are officially dead, Fiat Chrysler has not lost interest in its French counterpart. Keeping its engine running in the United States is essential to retaining the company’s allure until Renault comes back to the table, or another merger partner takes its place.

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