Fiat Chrysler (FCAU) raised guidance for the remainder of 2015 as revenues jumped and profits nearly doubled, but with FCAU stock up more than 5% today, investors should be cautious. 
London-based FCAU reported revenue of 29.2 billion euros, a 25% increase from the same quarter last year. Earnings before interest and taxes rose to 1.53 billion euros, up from 968 million euros last year.
Management increased North American EBIT from 595 million euros to 1.33 billion euros for the quarter by lowering fleet sales, and cutting back on discounts to dealers.
The more profitable retail sales helped FCAU report a growing profit margin of 7.7%, up from 4.9%. While that figure looks impressive, Fiat Chrysler stills trails Ford (F) and General Motors (GM) who boast margins of above 10%.
Furthermore, FCAU experienced a 40% revenue jump in North America while revenues rose 19% in Europe. However, the company is experiencing difficulty in Asia and Latin America, where respective sales came in flat and down for the quarter.
Moving forward in 2015, Fiat management believes adjusted EBIT will be 4.5 billion euros, at the top end of the previous guidance of somewhere between 4.1 billion and 4.5 billion. Revenue expectations were increased to 110 billion euros, from 108 billion while worldwide shipments are expected to be 4.8 million units, at the low end of a previous 4.8 million to 5 million range.
The Dangerous Details of FCAU
After looking at all the figures, it would appear buying FCAU stock today is a no-brainer. But before you pull the trigger, let’s take a look at a few items Fiat needs to deal with in the future.
First, Fiat Chrysler was hit with a $70 million fine from safety regulators and has agreed to buy-back defective Ram pickup trucks and a few Jeeps. Sergio Marchionne, Fiat CEO, believes the total buyback program will cost the company about $20 million.
While some have stated that figure is way too low, it doesn’t seem unreasonable considering the total amount of vehicle repurchased will likely be around 200,000. FCAU will be spending nearly $100 million on this issue and could lose customer loyalty over the situation, ultimately hurting the company’s long-term prospects.
Next, while Fiat showed great gains in North America this past quarter, interest rates are likely to rise in the coming months, which will certainly hurt its largest market.
Additionally, Jeeps remain the driving factor in Fiat’s North American growth, but they aren’t exactly fuel-friendly relative to most other new vehicles. Like interest rates, gasoline prices are eventually going to increase — and when they do, Fiat may once again have difficulty selling vehicles that cost the owner a lot of money to fill the tank.
Bottom line: As it sits today, FCAU stock is a buy based on management’s forecast and recent performance. But investors should pay close attention to the automobile market and interest rates, gasoline prices and public opinion all affect Fiat Chrysler in the future.
As of this writing, Matt Thalman was long Ford. Follow him on Twitter at @mthalman5513.
