Fiat may get mileage from Chrysler after all

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While some analysts think Chrysler is unsalvageable, others are now taking the view that Chrysler is a turnaround story in the

Maybe, just maybe, Fiat Group SpA's link with Chrysler Group LLC will translate into dazzling stock market success.

While some investment analysts think Chrysler is unsalvageable, and therefore of no use to Fiat, others are now taking the view that Chrysler is a turnaround story in the making, one that could lift the Italian auto makers' fortunes.

In a Nov. 20 note, UBS said Fiat's partnership with Chrysler in the near term is worth €1 ($1.49 U.S.) a share to Fiat, equivalent to 10 per cent of the Italian auto maker's latest share price.

"We continue to see value in Fiat as an agent of transformational change and not owning Fiat is akin to a risky bet against structural change in European autos," UBS analyst Philippe Houchois and his colleagues wrote.

The most bullish endorser of the Fiat-Chrysler partnership is Adam Jonas, Morgan Stanley's European auto analyst. In a report published last month, he rated the shares a "buy" because the "current share price massively under-appreciates the substantial call-optionality that Fiat shareholders have with the tie-up with Chrysler."

Fiat, led by Italian-Canadian CEO Sergio Marchionne, owns 20 per cent of Chrysler, for which it paid nothing, and can boost it to 35 per cent under certain conditions, such as producing a car in the United States that achieves 40 miles a gallon. Mr. Marchionne and his team took management control of Chrysler in the summer.

Fiat shares, listed in Milan, have been among the industry's best performers, with one-year return of almost 108 per cent and a 6-month return of 28 per cent. The equivalent figures for France's PSA Peugeot Citroen are 94 per cent and 23 per cent. UBS downgraded Fiat to "neutral" from "buy" on Friday, not long after Fiat shares topped €11, more than three times their 52-week low. They closed the week at €10.

Mr. Marchionne's turnaround plan for Chrysler assumes the U.S. auto market will rebound to 14.5 million sales in 2014 - a figure analysts consider credible - from 10.5 million this year and that Chrysler's market share will rise to about 14 per cent from less than 10 per cent this year. Chrysler will rely on Fiat's small-car platforms to overhaul Chrysler's clapped-out fleet of passenger cars and small SUVs. The first Fiat-inspired cars are to reach Chrysler showrooms in 2011.

Mr. Jonas, of Morgan Stanley, thinks the synergies of combining the Fiat and Chrysler platforms and other business operations, such as purchasing, could average €1.7-billion a year starting in 2011.

In October, he valued Fiat's stake in Chrysler, plus the synergies, at €8.5 a Fiat share, raising his target price for all of Fiat to €16.80 a share.