DaimlerChrysler unveils its latest restructuring plan for ailing U.S. arm Chrysler on Wednesday, almost six years to the day after its first try at shoring up profits from across the Atlantic.
Analysts expect the world's fifth-biggest carmaker to cut thousands of jobs and close two North American plants at Chrysler, which Chief Executive Dieter Zetsche ran until taking the top spot in Stuttgart at the start of last year.
Zetsche's credibility is at stake after a shock profit warning at Chrysler last year as it sleepwalked through an abrupt shift in consumer tastes that brutally exposed its reliance on trucks and SUVs at a time of high fuel prices.
Analysts polled by Reuters expect Chrysler to have posted a 2006 operating loss of more than 1 billion euros, its third full-year loss since its 1998 merger with Daimler-Benz.
But the market will seize on the strategy to halt the red ink rather than the numbers themselves.
"Chrysler has 12 major assembly plants and 17 stamping and component facilities in North America. We estimate as many as half of Chrysler's assembly plants could be in some way affected by the restructuring," Morgan Stanley said in a research note.
The plant in Newark, Delaware, is especially vulnerable, analysts say. Closing that plant would cost around 300 million euros but save more than 200 million a year, worth nearly 15 euro cents in earnings per share, Morgan Stanley estimated.
Analyst Georg Stuerzer at German bank HVB said the challenge was creating a platform for sustainable profits at Chrysler.
"The Chrysler restructuring plan could in our view reduce capacity by around 15% and cut costs by more than 2 billion euros in all. We see the program costing 1.2 billion," he said in a note to clients.
Should Chrysler make an annual operating profit of 1 billion euros from 2008, the stock could trade at 59 euros, he said.
It trades at around 49.25 euros now, more than 13 times estimated 2007 EPS, according to Reuters data. That puts it at a premium to BMW on 11 times 2007 EPS but trailing fellow turnaround play Volkswagen at 14.5 times.
UNDER PRESSURE
Despite restructuring under Zetsche that cost 40,000 jobs and shut six plants, Chrysler remains under pressure given declining volume in North America, a fierce price war, and the cost of providing healthcare to U.S. staff and retirees.
It has brought in experts from sister brand Mercedes-Benz and outside consultants to help it meet its target of cutting costs per vehicle by $1,000.
Chrysler employed 82,330 workers at the end of September.
Morgan Stanley said a 10% cut in total headcount could represent 100 basis points of Chrysler margin, or a 10% accretion in group earnings per share.
According to the Detroit News newspaper, Zetsche is counting on closer sharing between Mercedes-Benz and Chrysler of vehicle architecture, know-how and components to rescue Chrysler earnings by finally plucking the fruits of the 1998 merger.
But the company would then be walking a strategic tight-rope it has avoided before for fear that it could dilute the Mercedes brand and its higher margins.
A complete spinoff of Chrysler, as suggested by some disgruntled German shareholders, seems to be off the table.
"Management commitment to restructuring may cast doubt on an imminent disposal, which has supported the stock," wrote analyst Stephen Cheetham at Sanford Bernstein. He rates the share "market perform" with a price target of 50 euros.