Fiat Chrysler (Mastermind Q3 discussion)

Guys, I need your help!

I'm pitching Fiat Chrysler Automobiles (FCAU) for the next mastermind meeting.

What would you like me to cover in the pitch and analysis?

What does your analysis show?

Comments

  • Hey @Stig ,

    As a current owner of FCAU, I believe the true value is unlocked when you look at the individual parts of the company as a whole and try to value them out. Also, the valuation metrics indicate it's super cheap. They have good FCF, rising revenue, have been paying down debt & earnings are stabilizing. To add a cherry on top, it seems Fiat might have some bidders for parts of the company or the whole company. Which could further the stock incline. One thing that worries me is the working capital but I'm willing to overlook it due to such a cheap valuation. So far it's paid off but we will see where it goes from here.

    Thanks
  • I agree with BufferGraham (I'm also a holder). Wall street's big concern seems to be net debt, which Sergio & management have committed to right sizing. They are also increasing their margins, which were near industry lows, by a better mix of sales of Maserati/Alfa Romeo and by lowering their fleet sales. It has just been trading cheap, with a solid management and plan in place and ever increasing EPS while simultaneously decreasing debt.
  • They have 3 brands that have huge potential: Jeep, Alpha Romero and Maserati. If i'm not wrong, I believe they talk about maserati on their last conference call and said it had the biggest margins out of all the 3 brands with potential growth.

    Also this is Monish Pabrai biggest holding in his portfolio, so definitely something to keep an eye on.


  • Check out at 51:45

    So far Sergio's plan/guidance is proving correct vs what the street is valuing FCAU at.
    The Jeep has been popular in China, perhaps the reason recent Chinese interest in purchasing FCAU.
    They are my 2nd highest conviction bet.
  • edited August 24
    Hey @stig,

    As a Jeep Grand Cherokee owner I can attest to the quality and value of their product. I'm also very familiar with the industry and agree that the biggest opportunities for FCA lay in the Jeep, Maserati and Alfa brands.

    I also agree with managements decision to scrap 200C sales. Compact sedans provide the least opportunity for margin, in addition to the fact no one seems to be buying them at the moment. Producing the Levante was the best decision I've seen them make of late, and it's reflected in the almost doubling of that segments global sales.

    All this being said I have one major concern, the lack of a captive finance arm.
    This lack of a finance arm substantially decreases their ability to weather economic turmoil and the US is on the precipice of a recession. Additionally, NAFTA is by far their largest and most profitable global segment. Is anyone afraid of them taking a disproportionately larger hit than the rest of the industry during a correction?
    I wish I could quantify this but unfortunately it's beyond my abilities (hopefully this post will prompt someone far more intelligent than I to take a look).
  • Thanks for your input guys.

    It's all really helpful!

    How have they followed the plan since 2014 (side from the comment that Mohnish gave) in your opinion @proudcolby?

    Reading through their 10K I think the NAFTA dependence you point out @istrong is a concern and framed differently that what Mohnish said. I'm more the "show me the money" type...haha...

    I can't wait to talk about this on the show (we record the 28th by the way).

    -Stig


  • Hi @Stig

    I am surely not an expert on automotive and especially not on FiatChrysler.
    Just looking at the numbers, it mostly looks good to me. Yes, of course capital intensive and they also have debt. But this is due to the business they are in. And Free Cash Flow is positive, all fine.

    The one concern I have: The stock does not look particularly cheap to me. Looking at the earnings of the past 10 years, the current stock price is quite high. Only when looking at the actual EPS right now, the stock seems visibly cheap. But as we know, this can be very misleading - especially for such cyclical businesses as in automotive.

    This does not mean, that this might not be a good investment. If there is indeed hidden and unlocked value, this might turn out fine.

    All I am saying is this: For me this is not a classical value pick. I would have to dig in much deeper to judge this.
    I am more of the lazy guy: I want the numbers to be so obviously wonderful, that almost nothing can go wrong. And this I do not see here.

    To give you two examples of stocks that seem easier for me to value (and which I also bought 3 days ago):
    Have a look at Foot Locker (FL) and Hibbett Sports (HIBB).

    Always great to have this discussion with you guys here!

    Thanks

    Christoph
  • @Stig

    Okay so they issue guidance and they have their business plan (complete plan available for download from website).

    Guidance has only been issued through 2017 per their quarterly report. They are on pace to meet/surpass the guidance TTM net profits 2.8B euro and guidance is 3B euro. Very plausible imo considering where they have started and the pattern of where they are going.

    Personally I don’t like to give too much of my investment decision around what managements estimates....they put the cart in front of the horse far too often. Although if/when management is capable it is worth hearing their point of view and how much validity to their arguments. In Sergio's case.....he has my attention.

    Below has links to their entire business plan, too large to attach.....it was updated January 2017.
    https://www.fcagroup.com/investorday/Pages/Home.aspx

    The business plan is what Mohnish has based much of his valuation on. As he talks about in his YouTube video, the street differs like 3:1 from what Sergio's plan outlines. So even if they fail in their business plan, the reality is probably somewhere in the middle from what the street values and what Sergio's plan outlines. It was obvious slap me in the face upside at that point. Each quarter that has gone by they appear to be on track.....certainly above what the street had valued them at.

    Best Regards,
    Colby
  • This is amazing guys!

    I actually also prepared a little myself - so I won't solely rely on you guys - even though I probably should...HAHA... Especially you Colby ;)


    The recording is tomorrow morning for me, and the episode will be out next weekend already. Let me get back to you with more info the coming days.

    Sorry for being so short - I have to prep the picks of Preston (TGT), Hari (STOR) and our new guest. :)

    Thanks again guys!

    -Stig
  • edited August 31
    Hey guys,

    So we have had the mastermind meeting, and it seems like no one except for me like the pick... So, obviously, I already bought shares in the company...haha :) - I guess I'm truly a contrarian.

    So my thoughts about the company as you'll also hear on the episode is that it's a cyclical stock and it's still on the uptrend. Now, it's not as attractive as when Mohnish bought it, but he definitely deserves his 5x returns. He trusted the management before they had proven himself. Now they have proven themselves since 2014 followed their plan, and the upside is smaller, but also more "certain." Well, at least certain in the sense that they have a track record of doing they say they intend to do.

    This is not one of the typical value investing picks. You can't look back at the last 10 years and see nice smooth margins, simply from the fact that the new company was formed in 2014 (and you never really have smooth margins in cyclical businesses).

    One of the reasons why I think FCAU is interesting is that I see the stock "flip on the multiple." In other words, Imagine that a stock's EPS is $1 and the market doesn't value that stock favorable. Say at a P/E of 4, but the EPS now increases to $3, That changes the sentiment, and it might be valued at a P/E of 8. If you do the math, you'll go from a stock price of $4 to $24. You'll see that on many turnarounds. The hard thing is to find the successful turnaround, and that is what Mohnish did.

    We also talked to Eric Cinnamond about turnaround which will be around in 2 weeks time or so. I've never really done a turnaround, so this is a field study for me too. I don't plan to hold FCAU "forever" which is my typical strategy. Perhaps Eric said it best when he said: "You have to do what makes sense to you." FCAU makes sense to me (I think ;)).

    -Stig
  • Does any analysis that does not focus in great details of its cyclical aspect has any value for a long term investment?
    I never saw an analysis on FCAU that take care of its cyclical business model...
  • @investor77 I have always thought the cyclical risk as well as all other headwinds, (high CAPEX business, union labor, etc) were already been priced in. No doubt this is a deep value....this is why I don't believe its rational to hold beyond 15x earnings or less. This is not a great long term business to own, and perhaps much of the margin of safety is already gone.

    The market for most of 2016 was pricing FCAU less than 10B. Sergio's plan had them at less than 1x EBITA in 2018 per the business plan. Massive uncertainty. The rest has been piecing together if management can pull off a stunt like this.
  • Man... all the Auto's feel like they are going to crash and burn... Looking around the streets of London everybody has a new car and so many are purchased on finance. If we have a serious shock anytime soon these cyclicals will plunge..
    Remember Peter Lynch's auto buying strategy!

    doesn't look like deep value to me! where's the margin of safety?
  • Here is my take on it, not mathematically but from an industry perspective. Fiat Chrysler's technology arm needs to start to product that impresses. I am not impressed with the implementation of their current infotainment systems or their current handling of their uconnect system.

    If you look at it from a pure technology standpoint it doesn't look positive as currently they are not performing to introduce Electric Vehicles or Self Driving Cars in an efficient or usable way. Here are some links:

    http://www.businessinsider.com/fca-loses-20000-on-every-one-electric-car-2017-10

    FCA is looking $20,000 on every EV Fiat 500 they make. That is not sustainable obviously. The other question will be that once an electric vehicle comes to market how will FCA make recurring revenue as the revenue in auto is largely also made by selling replacement parts which are non-existent almost in the engine when you have EV.

    I would probably consider going either to manufacturers that are positioned in the EV space or are extremely niche to play auto at the moment.

    Maybe VW a few months ago would have been a better thought.
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