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This Auto Giant Warns the Chip Shortage Will Worsen. Why the Stock is Climbing.

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The Prima 500 electric car displayed in front of the Stellantis logo after it was added on the facade of the Fiat Mirafiori car plant in Turin, northern Italy on Jan. 19, 2021.

Agence France-Presse/Getty Images

Stellantis, the automobile giant formed out of the merger between

Fiat Chrysler

and PSA Group, has warned that the production impact of the global chip shortage will worsen in the current quarter before a slight improvement in the second half of the year.

The group’s European-listed shares climbed 4% higher in Wednesday trading, with the New York-listed stock ticking up near 3.5% in the premarket, as

Stellantis

’ first quarterly results postmerger showed growth in revenue and shipments.

Read:Fiat Chrysler and Peugeot Are Creating the World’s Fourth-Largest Car Maker. Italy May Want a Piece.

The back story. The merger of Fiat Chrysler and PSA Group, which completed early this year, brought together storied European and American car brands, combining the fleets of Fiat, Chrysler, and Jeep with Peugeot, Vauxhall, and Citroën. The $52 billion merger, in the works since 2019, puts the group on track to produce around 8.7 million units a year as the world’s fourth-largest car maker.

But the global shortage of semiconductors could get in the way of headline production figures. A worldwide shortage of computer chips has affected industries from personal electronics to automobiles, where they are used widely in critical systems from power steering to parking sensors. Rivals like

Volkswagen

and

Ford

warned of a looming production crisis in recent quarterly earnings, with Ford projecting a $2.5 billion hit to earnings from the chip shortage.

Read:Daimler Crushed Earnings Expectations. Expect the Same From These Other Auto Makers.

What’s new. Stellantis said on Wednesday that revenue in the first three months of 2021 was €37 billion ($44 billion) on a pro forma basis, up 14% from a year ago. Combined shipments of 1.6 million vehicles in the quarter represented 12% growth from the same period in the year prior. Growth was strong across all regions except North America, where shipments fell 4%—largely due to the global semiconductor shortage weighing on production, the company said.

In fact, the chip shortage was behind an overall 11% hit to production in the quarter, representing around 190,000 units, the group said. The company expects the shortage to have an even worse impact in the current quarter, before “some improvement” in the second half of the year.

“In our first quarter since the Merger, Stellantis posted strong Q1 2021 revenues with the diverse brand portfolio driving increased volumes, positive pricing and improved product mix, despite the headwinds from the global semiconductor crisis,” said Richard Palmer, the group’s chief financial officer.

Stellantis doesn’t report earnings on a quarterly basis. The company confirmed its full-year guidance for an adjusted operating income margin of 5.5% to 7.5%, ahead of a 5.3% aggregate margin at Fiat Chrysler and PSA in the year before the merger.

Looking ahead. Stellantis’ results show that the black cloud of the chip shortage is heading its way. But that didn’t stop the stock from accelerating higher on both sides of the Atlantic, as investors welcomed the otherwise upbeat earnings from the group that show strong volumes across the board and excellent revenue growth.

Both Fiat Chrysler and PSA Group are weak in China, and successful expansion in the world’s largest car market is viewed by analysts as critical to Stellantis’ success. Wednesday’s results show a 45% growth in shipments to the country in the first three months of 2020—a welcome sign. Analyst Philippe Houchois at Jefferies raised the target price on the stock to €21 on Wednesday, implying that the shares have legs to climb more than 45% higher.

Yet the chip shortage means unavoidable bumps lie in the road ahead. Carving out €5 billion in annual cost savings through synergies, promised to investors in the merger, was always going to be a tough job for Stellantis, and undue production pressures won’t help.

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