FCAU

Hi there:

Can anyone help me understand intrinsic value of FCAU. Pabrai has 50% of his investment on this company. With Ferrari IPO coming, I tried to read Greenwood investors' research update on it and it went above my head.

If anyone can summarize, what they have understood about this company, it could be another good investment opportunity since both Mohnish and Guy are heavily invested on it.

Comments

  • It took me a long time to realize how great FCAU is.
    Great CEO practicing effective capital allocation.

    America loves the jeep.
    There is a massive following of this brand, check google search of jeep forums.....540k members compared to tesla motors 45k members. This hadn't clicked for me until I read Scott Fearon's Dead Companies Walking; that a significant percentage of the masses may have different preferences than myself. I personally dislike Fiats and Jeeps....I cannot deny that this 4x4 utility vehicle is beloved in America.

    What really jumps off the page at me now is the fact that this enterprise trades for 12B!? This is extremely cheap for relative valuation to GM or F that are 7-8x capitalized. From reading 10-Ks and 10-Qs the areas that they are seeking growth are very plausible.

    They are not perfect, much like any company there are flaws. The downside for me is dwarfed by a more recently obvious upside.

    This is a cigar butt, that may very well be an entire cigar.
  • Aren't FCAU operating margin in North America (where the most of the profit comes from) way lower than competitors?
    Is it in a cyclical business, with low ROC, at the top or near the top of the cycle?

    This are not rhetoric questions just wondering...
  • Correct, at least that's how they were previously run. Management now are be focusing more on their good ideas. For example they are going to focus more of jeep production, 1.2M jeeps is not too crazy and is really capturing a very small part of the market. Given their size they don't exactly need much of the market either. They are also very gradually going to sell to china. There's no telling how popular they will be over there, although if they attempt gradually it's very low risk high reward.

    As per the cyclicality, I am not certain. I do not plan on timing the automotive market. I am seeking the $3 EPS in 2018 (conservative estimate). At current capitalization; that's some sweet 3x earnings. Okay so let's say there is market selloff and revenue declines 50% is it still a good buy? I would still be very happy with some 6x earnings. I understand these are very imprecise figures....but that's the beauty of it, they are so deep value you get a great margin of safety.
  • @prodcolby also having a look at this one. It's not only monish and guy pick, B.Miller a recent guest on the podcast also has a small position. Here is my question though is the equation actually linear. If revenues decline 50 % do earnings decline 50%? Especially when there is leverage in the equation it generally doesn't work like this, if revenue goes down earnings go down much more.

    Overall though i would say out of all the automakers this one has the most promise from a shareholder perspective, and they have been crushing it.
  • Correct, it's not at all linear....the true number will change depending on what type of margins you assume per each valuation.

    Id also add that I was confused by the spinoffs. It's clear now that the idea was to focus on their core competencies like the jeep or better ROC endeavors.
  • Well also ferrari's value was hidden within FCAU, think when monish bought in, the whole company could be bought for less than where ferrari is trading right now or something along the lines, haven't looked at the exact valuations and purchase dates.
  • If you like FCAU I suggest to have a look at Exor.
  • That is a good point, there is a bit of a complex capital structure at play here. Are there cliff notes somewhere as to what you get with each type of share. Would be interested for both Exor, FCAU and RACE (Ferrari) .
  • Here you get all the info: https://www.exor.com/home/INVESTOR-RELATIONS.html

    I had it....made some money and sold it today...the NAV cagr% of 20%+ probably is misleading because they start accounting for it from 2009...after the crash....however still an above average cagr%....

    This stuff is not what I want to do.....I did invest it because of desperation under this thesis: You buy with a double discount crappy businesses ( half of Exor is decent business in Partner Re) with good/great management on top that have decent/good track record....
  • Anyone have any views on the impact of the epa chargers?
  • EPA are sure on the warpath thats for sure!
    Ive read a few articles that claim the programming used to cheat emissions is not as incriminating as what volkswagen was doing....but i'll be honest I haven't got a clue on what will happen exactly. My estimate is a max 3.5B in fines. That is approximately proportional to what volkswagen settled on a per vehicle basis.

    There is a silver lining though, corporate fines are tax deductible and not due immediatly like we would have to pay a speeding ticket. 3.5B over 10 years is not that big of a deal. Its almost never as bad as what the media makes it out to be, media estimated 90B for BPs oil spill....ended up costing 19B again all tax deductible.

    If cap can fall down to 12B range again, I will likely buy.
  • Lev
    edited January 16
    An interesting question is why 12 billion? What if it hits 13 billion, you won't buy? To me any situation where i don't see how the thing doubles does not make sense, with maybe some minor exceptions in special situations. So even from 12 a double is 24, so even at 15 it would look attractive, if i believed 24 was likely in the cards. Also if 24 is likely in the cards than 30 is almost as likely, given the market cap of auto markers 6 billion is a drop in the bucket. If i don't think 24 is likely than why would i buy it even at 12. For an average company a 30% move up is just as likely as a 30% move down, think actually the down move is more likely. Research has shown that its new companies and a small number of companies account for all of the index gains. Not the same players gaining year after year. I am just try to understand the logic that says 12 is the number, rather than 13, or 14.
  • edited January 16
    @Lev you are exactly correct. If the EPS does what I believe it will do 24B wouldn’t be that ridiculous of an entry point. The reason is 12B for me is, I already have a 5% position @ 13B and would like the opportunity to average down a little. Typically everything I buy immediately goes down.....so I try to give myself time building a position setting lowball limit buys and sitting on them for months and months.

    Like a small team of goldman analyst recommending buy does not change the intrinsic value but it will make cap move like crazy. Perhaps by goldman saying its buy is a certain degree of certainty? Same with high uncertainty with emissions scandal.....Mr.Market cannot determine risk from uncertainty. I am willing to buy uncertainty provided the core business remains close to the same and the pattern of management modus stays the same.
  • @proudcolby , " I already have a 5% position @ 13B and would like the opportunity to average down a little " , that sounds like price anchoring .

    Think the biggest practical problem that i have with such an approach is as follows. If i understand the research correctly there are not that many double opportunities out there. Especially when the market as a whole is not inexpensive. Further there will be even less that i take a look at. And even less that i understand. So if i see a double, i am silly for quibbling over 10%. But of course everyone has their own approach, and there are many factors to consider (ex. position size, amount held in cash, approach to cutting losses, ect.) , just my 2 cents.
  • Yeah.....its really is stupid. I feel like with the news that has come out....I am deserved a little bit of a bargain. I concur it is foolish....its more me being cheap or wanting a bargain. I suppose its behavior such as this that makes Mr.Market in inefficient in ways.
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