The automobile industry made headlines recently when Fiat Chrysler Automobiles (FCAU) was slapped with a record-breaking $105 million fine as a result of mishandled safety recalls of millions of its Ram pickup trucks. The stock has fallen about 4.5% since the news broke, and while the PR world insists that “no publicity is bad publicity,” I have to argue in this case.
Let’s back up a moment, first. FCAU is the seventh-largest automaker in the world. It designs, engineers, manufactures and sells some of the most well-known automobile brands across the globe. Some of its many brands include Fiat and Chrysler — as the name suggests — as well as Jeep, Dodge, Ram, Ferrari and Maserati. The company is located in 40 different countries, with its commercial relations expanding to about 150 countries.
As a result of poorly executing 23 different recalls of more than 11 million defective vehicles — which management eventually admitted to doing — the National Highway Traffic Safety Administration imposed a whopping $105 million fine on the company. In addition, FCAU may have to buy back up to 500,000 Ram pickup trucks as a result of defective steering parts that could lead to loss of control, which may cost the company as much as $2.5 billion.
The news of FCAU’s settlement is concerning from both an investor’s perspective as well as a customer’s. The largest fine in the history of the automotive industry was greeted with little more than a yawn, at least at the dealership where I lease my Jeep. In fact, a family member was there the day the news broke, but instead of a kind salesman mentioning anything to her, all we learned was that it would cost $400 to put a soft-top on the Wrangler. It’s exactly these kinds of low-budget tactics and lies that give this industry a very well-deserved poor reputation.
There have also been rumors of an effort by management to buy General Motors (GM), although I suspect that after GM’s recent strong earnings report — in which CEO Mary Barra blew consensus out of the water — any such plans will be put back on the shelf. While both FCAU and General Motors have taken market share away from Ford (F), GM has a much wider breadth of products that will help it continue its recent gains.
If you’re still looking to buy into FCAU in the near term, I think there could be 10% upside from here. That being said, the company having to repurchase up to $2.5 billion worth of vehicles is certainly an unknown factor, even if some of those buybacks are turned back into sales.
Near-term momentum will likely carry the stock, but looking longer term, the same miscues that caused Fiat to leave the American market and join Chrysler could reappear. Personally speaking, I’m no longer a buyer of FCAU stock or FCAU products.
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