Fiat Chrysler (FCAU) – Coffee with Abhishek

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The investor community has long believed that FCA is an inefficient European automobiles manufacturer, drowning in debt and overexposed to poorly performing European markets or to emerging markets with economic difficulties. Even if there is a little truth to that, things have improved dramatically over the last decade. Fiat Chrysler is a fantastic special situation, led by the best management in the industry. The company has transformed itself into a global player at various levels. This is not the ideal business I would like to own for a long time but a special situation of Heads I win, Tails I don’t lose much. Let’s see if this fits into my circle of competence and if we can understand the business economics first.

The auto industry is divided into two sub-industries – Original Equipment Manufacturer (OEM) & Auto Ancillary. Global OEM manufacturers include Volkswagen, General Motors, Ford, Toyota, BMW etc whereas auto ancillary manufacturers are the OEM parts suppliers such as Magnetti Marelli, Teksid, Comau etc. The revenue is generated from the sale of automobiles and after sales market that includes, servicing, maintenance, and spare parts. The volume of revenue generation is the highest in the sale of automobiles, but net profit margins are low. The replacement market or after sales market generates revenue with a higher percentage of net profit margin. Overall, there is a huge competition in the industry as players try to garner more and more market share.

Capital Intensive – Manufacturing automobiles is an extremely capital-intensive business. The cost structure of OEM’s has the highest percentage with the raw materials. It requires massive assembly plants, large capital outlays for the heavy machinery needed to assemble vehicles, large stockpiles of parts inventory, and big maintenance expenses to keep it all up and running. Before one dollar is made on a new car model, millions must be spent just to produce that first one-off the assembly line. The business requires a lot of up-front capital which is usually raised in the form of debt.  Thus, automakers by their very nature are heavily leveraged, and when sales decline as they did in 2008, these companies quickly begin to exceed their debt covenants. Naturally, that leads to bankruptcy – which we saw in case of both GM and Chrysler around 2009.

Economically Sensitive – It is one of the hardest hit industries in a recession, as autos are extremely expensive consumer discretionary purchases. Consumers can easily delay new car purchases, decide to maintain existing vehicles or even decide to buy a used car to save money. Recently, I have been wondering if I should sell my used car (worth $15k) and get a commuter car for less than $4000 rather than paying $300 monthly payment. Unfortunately for car makers, recessions are the most difficult times to refinance or secure new debt financing, and equity financing is pointless as stock prices are at their lowest.

Slow growth/Lower margins – Total Vehicle Sales, currently at 17 Million in the United States have averaged 15.57 Million from 1993 until 2018, reaching an all-time high of 21.77 Million in October of 2001 and a record low of 9.05 Million in February of 2009. Few analysts are predicting sales to drop from current levels. There are no recurring revenue streams in this business. Even most frequent car buyer goes 2-3 years between purchases. Most wait 6-8 years. The excessive capital infusion needs to make the return on investment potential for such businesses limited. The business has some of the worst margins in the industry (6-8%)

Moats – There are very few competitive advantages in this business. Quality and economies of scale can allow lower prices and slightly higher margins. A strong consumer brand i.e. perception of quality and performance allows certain automakers to charge higher prices for similar vehicles. However, these can quickly vanish if there are safety/durability issues. Technology/Electrification has become a huge competitive advantage for Tesla, but the carmaker has not produced earnings for the last 10 years.

Lease car market – There is a huge lease car market in the U.S. that has grown since the last recession. These cars are likely to peak their expiration in upcoming years. This will put pressure on used car prices which are likely to lower new car sales going forward as a year-old car will be much more affordable. Greg Gardner, Auto Sales Are Down, 2018.

Technology – Currently, there is a very big shift happening in the development of electric/hybrid cars. Technology, although an important driver for future growth has not been economical yet. Even consumer costs for the electric car are more than normal which would take a long time to make this change materialize in the U.S and even globally. Currently, automakers have been losing $7-10K per electric car sold and it would take up to 2030 for electric cars to be profitable. Domenick Yoney, insiders “Moody’s says automakers lose $7,000 to $10,000 per electric car sold, 2018.

Another change that the auto industry is going through is autonomous driving. The technology is yet to prove itself with enough simulations and keep in mind that car makers will have to pour $billions to make this change into a reality. I was surprised that Google’s Waymo has already started riding taxis into Chandler, Arizona since October 26th, 2018. Youtube “Waymo’s fully self-driving cars are here” 2018. There are obvious benefits and machine learning will eventually help us get there but getting to level 5 passenger cars in the U.S in the next 5 years looks like a stretch to me.

To conclude the business economics, I would like to quote Warren Buffet here, “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”. Auto manufacturing is one of the most difficult businesses in the world. The combination of huge capital requirements and economically sensitive sales cycles leads to high financial risks. They have a long history of failures and even if one succeeds in creating a strong, well-recognized brand, the economics of the business makes it very difficult to succeed over the long term. Magic Diligence, “Why Investing in Auto Makers Is So Damn Risky” – | Seeking Alpha, 2018. I won’t blame you if you decide to move onto something after reading this and that’s one reason I wrote this preface. However, I would argue that the following proposition is very interesting, at least to me and Mohnish Pabrai as well.

Fiat Chrysler…Italian flair with American power!   

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FCA currently owns multiple global automotive brands under its umbrella that includes Jeep, RAM, Dodge, Fiat, and Chrysler. It also owns luxurious brands such as Abarth, Alfa Romeo, and Maserati. Originally, Fiat was an Italian automotive company which took over Chrysler in 2009 when Chrysler was headed for bankruptcy. Thanks to the man behind the wheels Sergio Marchionne, who literally pulled Chrysler from deathbed to the state of living over the past decade when he took the charge in 2004. Unfortunately, Sergio passed away in July 2018 after cranking FCA on full throttle, meeting their business targets. Mike Manley who brought Jeep back into the global markets will serve as the CEO going forward.

Image 1Source: FCA Annual Reports

SUV’s and Light Trucks are likely to eat more than half the pie of global passenger car market by 2022. This trend has been evident in the U.S since 2015. Keith Naughton, The American Sedan is Dying. Long Live the SUV, 2017. Sounds strange right? Why would people move from fuel-efficient sedans to big crossovers? Back in the days, average gas prices were $4 whereas they are currently at $2.5 per gallon. Moreover, newer SUV’s bear little resemblance to the previous gas consuming machines. They are built on smooth-riding, lightweight car frames which helps them achieve equivalent mileage to the sedans. And, who doesn’t like bigger space? Another caveat of this trend is hybrid/electric SUV’s; We know that the U.S has more supply of crude oil than the middle east and Russia. Thus, oil prices are likely to moderate at $70 over the next decade which is not a very large number. Matt Egan, U.S. has more untapped oil than Saudi Arabia or Russia, 2016.

Image 2Source: FCA Business Plan 2018-2022

Fiat Chrysler is the best-positioned company to benefit from this trend because Sergio recognized this way back in 2011. FCA gets 75% of their global profit from North America. Thanks to Sergio and great management – they have strategically reduced their Fiat and Chrysler products and are focused on high margin sales that include Jeep, RAM, Alfa Romeo, and Maserati. FCA US Reports 2018 September Sales, 2018. There is certainly a shift of market share and it can be seen from the fact that FCA has recently outsold ford after 11 years in the U.S. Nora Naughton, FCA outsells Ford for the first time in 11 years, 2018. Chrysler, even though with lower sales overall has increased the sales of Pacifica – the only hybrid minivan in the market. It will be interesting to see similar technology being rolled out in Jeep and Ram trucks. FCA recently sold their Auto Ancillary parts company (Magnetti Marelli) for about $7 billion which use to produce EBIT of $0.8 Billion. FCA still holds 2 more OEM parts manufacturers (Teksid and Comau) supporting their multiple brands. Management has cleared their intentions to develop these businesses further and eventually sell them at a premium.

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FCA is behind its rivals in terms of technology advancement partially because management strongly believes that Electric cars is a money losing business for the near future. FCA has one electric car – Fiat 500e in the Italian market and Sergio has repeatedly talked about how they are a money-losing game and urged customers not to buy it. Electric cars are not profitable for automakers and even for customers at the moment. Dee-Ann Durbin, “Electric cars have benefits, but likely won’t save you money”, 2018. Irrespectively, major automakers are speeding toward electric cars due to regulatory changes that are affecting the Chinese as well as global market. General Motors have made a huge investment in electric cars and hope to become profitable by 2021. However, with their current Debt to Equity ratio of 2.6, I can’t imagine company earning very good returns on investment for at least a decade. Aparna Narayan, “How to make electric vehicles profitable as Tesla, GM look to build millions”, 2018.

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Mohnish Quotes, “Tesla makes awesome cars, but it is a negative operating margin business and requires extremely high capex. Fiat does have an electric car and will also have a plug-in hybrid as well. Once (if ever) Tesla is able to make money on a $35,000 Model 3, it will have a close of it (with Italian flair and styling) in the market within a year. If Elon is successful with Tesla, he will not be a threat for a long time. FCA makes money on Jeeps, RAMS, and minivans, and Tesla has no products that compete for head to head with any of the main FCA “cash gushers”. Electric cars won’t ruin the FCA investment thesis.”

Autonomous driving, although still not completely viable, has exploded the opportunities for automakers and technology companies. Robo-taxis are assumed to become $2.3 trillion markets by 2030 with Google’s Waymo stealing staggering 60% market share. Waymo is on the forefront of it and has started to charge customers for their driverless taxis in Chandler, Arizona as of late October 2018. Youtube, first look inside waymo’s self-driving taxis”, 2018. It will be very interesting to see a hybrid/electric technology in Jeep and RAM trucks in near future. FCA aims to bring level 3 in car passenger market by 2022. They have made partnerships with BMW and Aptiv (Tier 1 company in autonomous technology).

Overall, the company is currently focused on cost savings and improving margins over the next 5 years which is likely why they are on the back seat for the electrification and autonomous technology. They are focused on working with key suppliers to improve the real-world performance of the business. With that being said, FCA is catching up and has decided to invest up to $9 Billion over the next 5 years to produce 30 EV models by 2022. Many of their models will be hybrid and just on the edge where they can meet the regulatory mandates. The company has only 5% market share in China, but this will be an important driver for their future growth.

Management (Sergio Marchionne & Mike Manley)

When Sergio came to Fiat in 2004, it was on life support and almost bankrupt. It had cycled through three chairmen, five CEOs and three heads of Fiat Auto in the previous four years. He nursed it back to health and solid profits so that, in 2009, when the much larger Chrysler was nearly liquidated by the US government and the lights were about to be shut off in Detroit, he was there to pick up the pieces. And he negotiated the purchase with no cash going from Fiat to Chrysler’s owners.

Mohnish Pabrai in 2016 said, “If one had invested ~$1 million in Alusuisse when Sergio became CEO in 1996 and then kept moving those funds as he moved, that $1 million would be worth north of $30 million today. And that includes twelve of those twenty years spent in the lousy car business – with zero prior experience in the auto industry. By 2019, when he intends to hang up his boots and study Theoretical Physics (yes, that’s right!), that $1 million will likely have grown to over $100 million.”

Sergio abandoned the great man model of leadership that long characterized Fiat and Chrysler. He created a culture where everyone is expected to lead. He understood that his job as a CEO is not to make decisions about the business but to stretch objectives and help managers work on how to reach them. Sergio Marchionne, “Fiat’s Extreme Makeover”, 2018. Management compensation is based on the company’s net cash/debt position. This is a very well thought model to compensate management based on the company’s overall performance.

Previously, Sergio had laid out a 5-year business plan back in 2014 and strongly delivered on its major targets before he passed away. FCA has consistently reduced their debt over the last 6 years and is now in a net cash position since June 2018. They have successfully established Alfa Romeo and Maserati as luxurious brands that command above-average margins with the additional spin-off of Ferrari which has rewarded FCA shareholders. Globalization of Jeep has delivered impressive results with the brand showing exceptional sales growth. Capital junkie, “how Sergio Marchione saved fiat and Chrysler” © Reuters breaking views 2018 is a 41-page report which is a great source to understand the why Sergio is named as one of the best CEO’s of past century.

Mike Manley

Mike Manley, the current CEO was a key player in bringing the JEEP back into the global markets. Jeep sales have risen from 320,000 vehicles in 2009 to 1.4 million in 2017 since Manley was appointed as the head of Jeep. He said being appointed the head of Jeep was ‘the turning point of his career’. Manley has been described as no-nonsense – workaholic who is demanding of his co-workers and not shy of the media. Mike has held multiple hats from being head of Asia-Pacific region, heading FCA’s international operations along with JEEP and RAM brands. Being asked if the merger was still in the talks, he said, “My intention is to deliver on the plan as a strong, independent FCA”

The current landscape in front of Mike is different and better than it was for Sergio. Sergio had to lead 3 separate corporations (FCA group, Ferrari and Magnetti Marelli), reduce debt, deal with other issues in the business and still unlock the value of shareholders. Now, for Mike – Jeep, RAM, Alfa Romeo, and Maserati have become profitable and established brands than they were 5 years ago. They crank around 10-12% margin on EBIT. The reduced debt and sale of Magneti Marelli is a good achievement that would allow Mike to focus on brand expansion and other goals listed in the business plan.

Competitive advantage

With its World War II legacy and seventy-five-year history, Jeep is an iconic global brand. In China, the term people use for SUVs is Jeep. Like Xerox, FedEx or Kleenex. Products like the Wrangler have virtually zero competition, Folks who aspire to own a Wrangler see almost any other SUV inferior. RAM has wrestled market share from Ford and GM. Since 2009, RAM’s US market share has doubled from 11% to 22%. Their Canadian performance is even better – going from 14% to 30%! FCA nets over $4000 on average per Wrangler. And, on average every Jeep nets them north of $2,500. The Chinese joint venture Jeeps are likely half of that say, $1,000/Jeep. RAM lets FCA print money on these trucks with average profits of over $5000 per truck or commercial van. Maserati is one of the premium brands that command 15% astonishing margins similar to Ferrari. This brand is mainly popular in China. Alfa Romeo is also a next decade story.

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Another competitive advantage is the management’s ability to isolate, ring fence and monetize different brands that can unlock a lot of value and upside potential. They have shown brilliant performance in the past with Ferrari spin-off and sale of Magneti Marelli unlocking hidden value in the company. John Elkann, chairman of FCA is committed to delivering shareholder value. Scott Miller of Greenhaven road capital shared following thoughts discussed with God – Charlie Munger about John Elkann and FCA. We all know that when God speaks, you listen, period!

Image 11.png

FCA’s today and tomorrow (2018 – 2022 Business Plan)

Sergio in 2017 laid out another 5-year business plan where they plan to double their earnings by 2022. FCA June 1, 2018, CMD_BP Financial Overview – Automotive News. Fiat Chrysler is targeting an EPS CAGR of 24%, through 2022 via improved operating performance and the effect of further deleveraging. The company is expecting further market recoveries in APCA, LATAM, and EMEA while NAFTA volumes are forecasted to remain broadly stable. The company is betting on the continued shift of consumer preferences from passenger cars to utility vehicles and hence, hoping its shipment volumes to outpace industry growth worldwide given its solid position in utility vehicles with the Jeep and RAM brands.

Image 4Source: FCA Business Plan 2018-2022

FCA’s strategy over the period is to continue leveraging its brand portfolio by adding new products to currently uncovered market segments, while also renewing its key high-volume products. Overall, the company is expecting those higher-margin products from Jeep, Alfa Romeo, and Maserati will continue taking more share in its brand mix at the expense of lower-margin brands (Fiat, Chrysler, Abarth, and Dodge).

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To achieve this improved product mix, the company is expected to spend $50B on CAPEX over the plan period – roughly the same level of CAPEX spending during the 2014-2018 plan period. This CAPEX spending will be targeted on global brands and to ensure that a high level of volumes will be generated from new or renewed products throughout the plan. This is a necessary condition to generate high returns on invested capital.

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The company is expecting to deliver $11 billion cost savings over the plan period, through purchasing and manufacturing efficiencies. Most of the cost savings are largely driven by a targeted reduction in the number of architectures and manufacturing efficiencies. With the combination of higher shipments, improved product mix and cost savings, the company has set very ambitious profitability targets, with double-digit margins by 2022 in all segments.

Valuation ( DCF/Dhandho Style)

There are two big assumptions in the plan that would have to come true. The first is that FCA will reach their target in the anticipated timeline, by 2022. The other assumption is that this will be their new cyclically-adjusted earnings going forward. The problem with the first assumption is that FCA is a company that operates in a cyclical industry and will always be more susceptible to economic conditions regardless of management brilliance. Any unforeseen recession could put non-repairable damage to FCA’s plan to achieve these targets within the committed timeline. The problem with the second assumption is that FCA may hit the $8.5 – 11 billion of FCF by 2022, but this level of FCF may not be sustainable. So even if you believed that FCA was going to reach their FCF target in 2022, the full amount should not be used to calculate the intrinsic value of the company. I would be more comfortable using cyclically adjusted earnings of about half of the 2022 target to calculate the higher-end limit of the intrinsic value which would equate to around $4.5 billion. Alex Middleton, Fiat Chrysler Automobiles: A Low Debt Enterprise with Big Upside Potential And A Bit Of Cyclical Risk, 2018.

Image 7Source: FCA Q3, 2018 Results

As per Q3 2018 results, the company has free cash flows of $2.6 billion and have provided guidance of net industrial cash flows to be around $2.5 billion by end of FY 18, plus the sale of Magneti Marelli will add $7 billion of excess cash in the balance sheet. FCA anticipates net income growth of 25% for the next 4 years with constant depreciation and disciplined capital expenditures to meet their targets. Pretty aggressive right? I assumed cyclically adjusted free cash flow growth of 16% for the next 4 years and eventually the sale of the business for at least 10 times 10th-year free cash flows.

CaptureSource: Self Calculated from business plan 2018-2022

Additionally, I added 25% additional margin of safety assuming my calculations could be wrong. We still arrive at an intrinsic value in the range of $26 to 35$ a share.

Image 11 - Valuation 1.JPG

The reverse DCF calculation shows that FCA is trading at a level that would expect them to earn cyclically adjusted free cash flows of $2.5 billion going forward. There are multiple events and uncertainties that have brought down the price recently which includes, Sergio passing away, challenges faced in China, Italy’s economic crisis etc. Thus, Mr. Market is severely discounting future earnings as it thinks they are not sustainable.

Image 11 - Valuation 2

Sum of the parts analysis

Another perspective of valuation which I found interesting during my research was EBIT multiples. FCA is expected to earn $8 billion in EBIT for a market cap of $25 billion in FY 18; that gives us EBIT multiple of 3. However, Maserati – mostly in China earns around $500M EBIT at 13% margin and could easily be worth $6 Billion. Add Alfa Romeo for free. Magneti Marelli was just sold for $7 Billion. These three brands contribute for only 20% of EBIT and can be worth $13 billion in total. Therefore, Investors are paying less than 2x EBIT for Fiat Chrysler’s crown-jewel (Jeep and RAM) plus the Fiat, Chrysler, and Dodge brands. (12 / 6.4 = 1.875)

FCA has provided guidance to have net industrial cash of $1.6 – 2 a share for FY 18 and sale of Magneti Marelli adds another $4.5 a share in the balance sheet. Thus, 35 % of the current market cap is in cash and investors are essentially paying 3 times current earnings of the company. That’s insanely cheap for a company that is set on a growth path! If we are to assume that the company reaches its ambitious plan of $7-9 of earnings by 2022, it is trading at PE of 1 excluding cash. Thus, Fiat Chrysler could easily be worth between $63-72 per share in 2022 (3-4 times higher than where it trades today) given a PE of 8 and adding back the $7 cash. Let’s add another 25% margin of safety that’s still more than a double. (Disclaimer: I don’t really believe in multiples, but the market does: P)

Value unlocking levers –

FCA has multiple value unlocking levers which have not been the part of their business plan. They can protect the downside with huge upside potential. FCA Morgan Stanley report, 2017 and ADW Capital Letter 2018.

  1. Issue GAAP Financials to expand the universe of its investors. By issuing GAAP financials, FCA can invite swath of U.S income investors seeking high dividend yield on small payout ratio and durable earnings. Following comparison provided by ADW Capital shows how cheap FCA is compared to their U.S. rivals.Image 9

Source: ADW Capital FCA Letter

  1. Potential spinoff/sale of FIAT which would allow management to focus on higher margin global brands and American market.
  2. Sale/Spinoff of Alfa Romeo/Maserati which would allow it to gain capital for its 2022 Business plan.
  3. Potential Merger with General Motors – ADW lays out value unlocking 8x return to investors in the following chart given company decides to go OEM consolidation route than standalone growth to 2022Image 10                                             Source: ADW Capital FCA Letter
  1. Achieving Investment Grade Rating would lower the cost of borrowing by 100bps. This could result in annual savings of $140 million.
  2. S Captive Finance – FCA does not have captive finance company in U.S. Establishing Finco can achieve sell another 100k car in the U.S and generate another $900 million of yield.
  3. FCA has contracted with Google’s Waymo which has already started riding taxis into Chandler, Arizona since October 26th, 2018. “Waymo’s fully self-driving cars are here. FCA has orders of 60,000 units by 2020 with 10% margin on them.
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Heads I win, Tails I don’t lose much

I believe FCA is a special situation of high uncertainty and low risk with the current stock price of $16. Here’s what I think can happen.

1. U.S. sales crank up to 18-19 million by 2022 as they did in 2001. Overall sales growth gets boosted from the Asia Pacific region as planned. The company successfully achieves their business plan targets by 2022 i.e earnings will be increased up to $9-10 a share from current levels of $4 per share. The debt will be lowered significantly. Jeep, RAM, Maserati and Alfa Romeo become exclusive high margin brands globally. Fiat, Chrysler, and Dodge will either be sold or have limited production. Multiple value unlocking levers get pulled such as U.S Captive Finance, a spin-off of Maserati at higher premium, Investment grade rating to reduce interest payments. Waymo/AV contract manufacturing sales boost etc. This can go either way where FCA achieves very strong balance sheet or starts gushing out cash to investors via more dividend payout. John Elkann, Chairman and CEO of Exor who a major shareholder of FCA is will try to take the money out of the business and invest somewhere else. There could be a merger offer from GM if FCA achieves their targets for consolidation which can drive the stock price crazy.

Odds I ascribe to this scenario playing out                                           20-25%

Equity Value in 48-60 months                                                          > $70 a share

2. U.S car sales will remain at 16 million annually. FCA raises market share with their sales increasing at a moderate rate of 10-12 %. Jeep will continue to dominate the utility vehicle market globally and RAM in U.S. Maserati and Alfa Romeo will continue to grow as premium brands in China and European markets and achieve better margins. Thus, Jeep, RAM, Maserati, and Alfa Romeo will eventually command 10-12% margins while Fiat, Chrysler, and Dodge will limit their production to their highest selling cars – Fiat 500 series, Pacifica and Challenger. Management will have to go through a few challenges such as diesel emissions case, trade war/tariffs, and global economic pressures. The real bet is on management’s ability to achieve better margins and higher cost efficiencies and not just on future sales growth. Management pulls multiple levers to unlock shareholder value by achieving investment grade rating and reduce interest payments moving forward, U.S Captive Finance yields $1 billion of additional earnings, a sale of Teksid or Comau (parts business), a sale of Fiat or Chrysler, Spinoff Maserati etc. This will allow earnings to rise up to $6-7 and free cash flows of $5-6 billion before 2022.

Odds I ascribe to this scenario playing out                                           55%

Equity Value in 48-60 months                                                          > $50 a share

3. Recessionary environment causes U.S sales to drop by 30% SAAR scenario before 2022. The company still remains operationally free cash positive even if U.S sales drop to 12 million from current levels of 17 million. This will eventually delay the business plan targets. However, for a company that operates with 159 manufacturing facilities and 87 research and development centers in 40 countries worldwide with minimal debt, I believe FCA is worth much more than at least $15 billion even when you consider the worst possible scenario. For instance, they are carrying over $11 billion of cash and trading right around the recorded book value of their organization. The company will adjust their inventory and capital expenditures along with a business plan to maintain higher margins. To justify a $12 – 15 billion valuation through cash flows, the company would only need to earn a cyclically adjusted amount of $1 billion per year. In the past year alone, their earnings have already contributed 3 times that amount. If this situation should occur I don’t believe the intrinsic value of the organization would change much and would likely just present an opportunity for investors to buy more stock at a cheaper price. A recovery in the auto sector would be imminent at some point due to FCA being one of the healthier companies operating in the industry. There is some “market risk” with the stock, which could see the stock price take a big downturn in a recessionary environment, but I believe it would eventually rebound in short order with the potential for significant upside given managements goals.

Odds I ascribe to this scenario playing out                                                  19%

Equity Value in 48-60 months                                                                  > $35 a share

4. 50 Mile meteor comes in or such an extreme event takes place that draws FCA’s equity value to zero and burns all the cash.

Odds I ascribe to this scenario playing out                                                  1%

Equity Value in 48-60 months                                                                  $0 a share

To conclude, there is always the risk of significant downside with cyclicals unless you invest at the bottom when competitors are asking for handouts from the government and interest rates are so low that the companies can afford to give away their products at 0% financing. That being said, I believe that FCA is one of the better-managed companies operating in the industry. They have consistently reduced their long-term debt. They don’t have a direct exposure in their most important market to a financing arm. They have also been very disciplined in their capital allocation which has rewarded shareholders considerably. If you are an investor with a temperament that can remain unemotional in this type of environment a smaller position of not more than 5-7% of one’s portfolio could be justified. This is probably one of my first real value bets. I would be hesitant in allocating any portion over this amount due to inherent risks with a cyclical company and its products that could change at any time.


  • FCA Annual Report, 2017
  • Capital junkie, “how Sergio Marchione saved fiat and Chrysler” © Reuters breaking views 2018
  • FCA, Confessions of a Capital Junkie, 2015
  • Magic Diligence, “Why Investing In Auto Makers Is So Damn Risky” – | Seeking Alpha, 2018
  • Domenick Yoney, Insideevs “Moody’s says automakers lose 7000 to 10000 per electric car sold.
  • Greg Gardner, Auto Sales Are Down, Why They ll continue to fall, 2018.
  • Youtube, Waymo’s fully self-driving cars are here, 2016
  • Youtube, first look inside waymo’s self-driving taxis”, 2018
  • Alex Middleton, Fiat Chrysler Automobiles: A Low Debt Enterprise with Big Upside Potential and A Bit Of Cyclical Risk, 2018.
  • Perspicar744, FIAT FCA IM, Value Investors Club, June 2018.
  • SA Transcripts, Fiat Chrysler Automobiles NV (FCAU) Q3 2018 Results – Earnings Call Transcript, 2018
  • Fiat Chrysler: What Is It Really Worth? – Ben Steinman | Seeking Alpha
  • Sergio Marchionne, Fiat’s Extreme Makeover, 2008
  • Fiat Chrysler: 100%-200% Upside Despite The Recent Run-Up – Fiat Chrysler Automobiles NV (NYSE:FCAU) | Seeking Alpha
  • Fiat Chrysler Has Great Upside Potential With Plenty Of Gas Left In The Tank – Fiat Chrysler Automobiles NV (NYSE:FCAU) | Seeking Alpha
  • An Evening with Mohnish Pabrai – Pabrai Funds Annual Meeting 2016
  • ADW Capital, Letter to FCA Board to Pursue Value Creation Strategies, 2018.
  • Ed Garston, An Inside View On Fiat Chrysler’s New CEO Mike Manley: Tough, Focused And Right For The Job
  • Phoebe Wall Howard, China tariffs: List delivers ‘gut punch’ to carmakers, auto industry, 2018
  • Chrysler Pacifica Hybrid, Francis Fukuyama, And The End Of History – Anton Wahlman | Seeking Alpha
  • FCA, Business Plan Update 2014-2018, 2016
  • Morgan Stanley, Fiat Chrysler Automobiles NV, 2017
  • Greg Gardner, Auto Sales Are Down, 2018.
  • Domenick Yoney, Insideevs “Moody’s says automakers lose $7,000 to $10,000 per electric car sold.
  • Keith Naughton, The American Sedan is Dying. Long Live the SUV, 2017.
  • Nora Naughton, FCA outsells Ford for first time in 11 years, 2018
  • Aparna Narayan, “How to make electric vehicles profitable as Tesla, GM look to build millions”, 2018.
  • Dee-Ann Durbin, “Electric cars have benefits, but likely won’t save you money”, 2018.
  • FCA June 1, 2018 CMD_BP Financial Overview – Automotive News.

Disclaimer: This is not a stock tip. These are my personal opinions for educational purposes only. Anyone who invests in any company needs to do their own due diligence and are themselves fully responsible for the outcome.

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Abhishek Shete

Abhishek Shete

Abhishek is a novice in investment. His write-ups help him separate facts from the perception which improves his knowledge. He enjoys reading about businesses, business models, playing badminton, poker, and cricket. On top of that, he is an ardent coffee lover.