Chrysler’s IPO Should Hit the Fast Lane

Chrysler Group, long the Rodney Dangerfield of the auto industry, finally is getting some respect. And that means now’s the time for the third-largest U.S. automaker to cash in on its new-found allure with an IPO.

Investors could find much to like about the Auburn Hills, Mich.-based automaker. First, unlike other “hot” future IPOs such as Groupon, it makes money. The parent of Jeep netted $212 million in the third quarter, surpassing analysts’ estimates that called for $211 million. Sure, only three analysts bothered publishing forecasts on Chrysler, but the results were a vast improvement over the $84 million loss a year earlier. Revenue surged 19% to $13.1 billion, helped by strong demand for the automaker’s 16 all-new or significantly revamped cars and trucks.

Chrysler, which recently signed a new contract with the United Auto Workers, may have set overly ambitious goals. As Bloomberg noted, worldwide sales rose 21% through the third quarter, but that’s far below the 32% increase CEO Sergio Marchionne, who also heads Fiat (PINK:FIATY), had forecast for 2011. However, that miss shouldn’t detract from an impressive turnaround.

Marchionne has said he plans a Chrysler IPO no earlier than 2012. That’s too conservative. As Chrysler and Fiat work more closely together, the strength of the U.S. company might get sapped away by the problems of its European parent, Fiat. Adding another hurdle are the economic problems in Fiat’s home country of Italy, which many pundits argue could be next to succumb to the euro zone’s debt crisis. Italian officials said Wednesday they would hasten to implement promised austerity policies. Although Rome rejected a plan to raise taxes on the wealthy, it’s hard to see how Fiat and other large Italian companies can avoid paying more to the government.

Trying again to crack the U.S. market

Fiat, which took over Chrysler during the darkness in 2009, is becoming more dependent on the U.S. automaker. Fiat is struggling in its home continent against rivals such as Volkswagen (PINK:VLKAY) — which is hotly pursuing a stated goal of becoming the world’s largest automaker — and it lost about 1 billion euros there last year, according to one analyst. Fiat now is making a new push in the U.S. with its updated Fiat 500 minicar, but it has been stymied for decades in marketing its brand in the U.S. Chrysler, however, is on a roll.

Fiat wants to raise its stake in Chrysler to 58.5% after paying off U.S. government loans and purchasing shares owned by taxpayers. VEBA, a health care trust affiliated with the United Auto Workers, currently owns 45.7% of Chrysler. An IPO is the easiest way for the VEBA to cash out of its position. But it might be willing to wait for improved market conditions. Reuters reported that the VEBA is “ in no rush to sell and is looking to get the best possible return.” Selling shares to the public also would help bolster Fiat’s balance sheet. Both Moody’s and S&P now have negative outlooks on Fiat’s corporate debt.

Even Consumer Reports, which has trashed Chrysler for decades for the poor quality of its vehicles, is starting to heap praise instead of scorn on the company and Marchionne. The CEO certainly helped his case with shareholders by raising Chrysler’s profit forecasts, excluding costs of paying back government loans of $600 million, to $500 million from an earlier projection of $200 million.

‘Paying off in the marketplace’

“Let’s have a nice round of applause for our pals at Chrysler Corporation. Sergio and his amici in both Italy and Detroit have brought the carmaker back from the abyss, and their efforts are paying off in the marketplace,” the nonprofit consumer research organization recently gushed on its website.

In fact, Jeep was the highest-ranked U.S. brand in Consumer Reports’ annual auto reliability survey released last month. Not surprisingly, Chrysler has had to spend heavily on consumer incentives — about $3,500 per vehicle — to counteract its well-deserved reputation for awful quality. Although those incentives are above the industry’s third-quarter average of $2,618, Chrysler managed to lower them by 6.4%, according to Bloomberg.

Add it all up, and the time for Chrysler to strike is sooner rather than later. Whether Chrysler will remain attractive six months after its IPO remains to be seen. However, if the revived Detroit carmaker can keep impressing consumers and critics, the stock eventually might be a good fit for investors with a high risk tolerance.

As of this writing, Jonathan Berr did not own a position in any of the aforementioned stocks. Follow him on Twitter at @jdberr.

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