Fiat Chrysler's targets seen at risk as North America still pressured

By Agnieszka Flak and Bernie Woodall

MILAN/DETROIT (Reuters) - Fiat Chrysler Automobiles could find it tough to meet its 2014 profit guidance and may cut forecasts when it reports quarterly results next week as slowly recovering North America profit margins may fail to fully offset weakness in Europe and Latin America.

The group expects to raise operating profit, excluding one-off items, by as much as 14 percent this year, but has been struggling to make up for a double-digit sales drop in Brazil and a fragile recovery in Europe.

Nearly all of the 15 analysts polled by Reuters expect the group to post a 2014 operating profit below the range of between 3.6 billion euros (2.84 billion British pound) - 4.0 billion euros (3.15 billion British pound) given by the company, with the consensus average at 3.29 billion euros ($4.16 billion), down from 3.5 billion euros in 2013.

Fiat traditionally reviews guidance after the third quarter.

"Given that Brazil deteriorated further in the third quarter and Europe is recovering at only a very tepid pace, it will be crucial to see how much of that weakness can be offset by North America," said Commerzbank analyst Sascha Gommel. "I think getting to the 2014 targets is too much of a stretch."

The North American operations, dominated by Chrysler, the third-largest U.S. carmaker which Fiat Chrysler Automobiles (FCA) now fully owns, have become an increasingly important profit generator for the company and now account for more than half the group's global sales after a six-year slump in Europe.

Second-quarter operating profit in the region fell even as sales rose, hit by higher incentives to sell older Chrysler models and a higher proportion of leasing deals, which offer lower margins than outright retail sales. The weaker performance was partially responsible for FCA reaching only around 40 percent of its guidance at mid-year.

ENCOURAGING QUARTER

The third quarter has been more encouraging, with shipments in North America up 18 percent, preliminary data shows. The quarter will also be spared the costs of launching new models such as the Chrysler 200 sedan incurred in the first half.

"Combined with an increase in transaction prices, Chrysler is positioned for solid profit gains in the third quarter," said Karl Brauer, an analyst at Kelley Blue Book.

U.S. incentive spending remained at around second-quarter levels, as did the share of sales going to leasing deals, data from Kelley Blue Book and IHS Automotive showed.

The consensus forecast for third-quarter operating profit for the group stands at 940 million euros with revenues at 22.3 billion euros, up 10 percent and 7 percent, respectively, based on a survey of eight analysts.

FCA expects group revenue to rise 7 percent this year to around 93 billion euros, in line with consensus, and vehicle shipments to increase to around 4.7 million vehicles this year, up from 4.4 million in 2013. In the first nine months deliveries stood at 3.55 million vehicles.

While the persistent weakness in Latin America has led other carmakers, including Ford, to slash their forecasts, FCA CEO Sergio Marchionne has said the group's leading position in Brazil, where it has a market share of 21.4 percent, gave it an advantage over competitors when dealing with market headwinds.

However, FCA volumes in Latin America are down nearly 12 percent so far this year, showing it also had challenges in a region that contributed nearly a third of profits in 2012.

Besides guidance, markets will also look out for the board's decision on future capital raising. When FCA debuted on Wall Street on Oct. 13, Marchionne said the group would tap debt markets "over time" and could also issue some equity "as safety" to protect itself in case the market weakened further.

Since the world's seventh largest carmaker moved its primary listing to New York on Oct. 13, shares have been seven times more heavily traded in Milan, its traditional market, suggesting U.S. investors are still taking a wait-and-see approach on the stock.

However, the stock gained 6.6 percent in that period, outperforming a flat performance in U.S. automakers GM and Ford.

(Additional reporting by Stefano Rebaudo in Milan, Jeffrey Dastin in New York, Brad Haynes and Alberto Alerigi in Sao Paulo; Editing by Elaine Hardcastle)