FCAU - Fiat Chrysler Automobiles

[txlaw]

http://www.bloomberg.com/news/articles/2015-04-29/fiat-ceo-s-proposal-for-apple-car-deal-isn-t-as-crazy-as-it-sounds

[karthikpm]

Anyone adding to their Fiat stake with the unexpected market reaction at Sergio's comments?

[TwoCitiesCapital]

Anyone adding to their Fiat stake with the unexpected market reaction at Sergio's comments?

 

I need it to go lower to justify adding. I bought most of position around $10 and sold a quarter when it got to $15-$16 since it went so quickly and we still need quite a bit in the way of results to justify the higher valuations we all hope for. I'm content holding at these prices but would probably only re-buy my $25% stake around if it fell all the way back to $12.

[merkhet]

Question to everyone that's been following Fiat.  If you had the three presentations that were posted yesterday (earnings, consolidation, and NAFTA margins) before the market did, would you have expected the stock to be up or down? 

 

The NAFTA margin target of 7% in Q4 and 8-9% by 2018 is a huge positive.  The five year plan only assumed 6-7% margins in NAFTA!  Yet somehow the article headlines for the day were "Marchionne panicked because sales are rising but margins are falling." 

 

And quantifying 2.5-4.5 billion euros a year to be saved from M&A is huge.  Also finding out Brazil will break-even in this kind of economic environment is very positive news.

 

My 2 cents, Sergio was trying to talk the stock price up (clearly didn't work) because the holdup to M&A is the current stock price, he doesn't want to split up a MergeCo based on todays equity value.  He specifically talked about how embarrassing the valuation is in the exchange with the analyst who asked who is this presentation addressed to and told him he had more say in this then he thinks.

 

I suppose Marchionne's combativeness might have spooked the market.

[merkhet]

Has anyone considered that this presentation might have to do with the labor negotiations coming this summer?

[PLynchJr]

Has the transcript been posted anywhere yet?  Still nothing on Seeking Alpha.

[karthikpm]

http://www.marketwatch.com/story/fiats-ceo-goes-down-the-rabbit-hole-2015-05-01

 

 

[LC]

Has the transcript been posted anywhere yet?  Still nothing on Seeking Alpha.

 

Haven't seen a transcript but there's info here: http://www.fcagroup.com/en-us/investor_relations/events_presentations/quarterly_results/pages/2015_q1.aspx

[Chalk bag]

Here you go. See attached.

 

I don't know why people are spooked by the negative reaction. I liked the name since 8 bucks but at this price the valuation is quite ahead. Why is everyone so bullish on it?

He told you there is massive duplicate R&D, he told you the ego in this industry is massive (himself included clearly), and he told you that they aren't gonna get anywhere close to WACC even in good times like this. How is this positive to the stock in any sense? And they are going to sink EVERY DOLLAR into CapEx until 2018 and investors won't see a single dime capital return -- while the company sports massive leverage -- and the worse thing is even with that it might not be enough. Fiat is going to go down 90%+ in the next crisis and will have existential issues when EV becomes competitive. Playing the cyclical is fine and we all do it, but this is not a good industry guys -- the stories are fascinating but, like Marchionne said, there really are better investments out there.

The labor union note is interesting, but I wonder why he is laying this deck out there -- who is it directed to? It's great information and I'm glad he did it, but I can't help but think it serves a greater purpose.

 

And the fight with the Bernstein analyst is kind of ridiculous. The call is a shit show really.

 

But what do I know. If anyone has insights on the next steps would greatly appreciate.

 

PS: Marchionne gets paid a lot. So I won't be surprised he is trying to talk up the stock / force a change in control to get himself paid. I respect the man for what he has done, but sometimes I find his aggression unnecessary (or perhaps he sees the dire future and is stressed out about it? That I can understand)

Fiat_Chrysler_Automobiles_N.V._Q1_2015_Earnings_Call_Apr_29_2015.pdf

[compounding]

Here you go. See attached.

 

I don't know why people are spooked by the negative reaction. I liked the name since 8 bucks but at this price the valuation is quite ahead. Why is everyone so bullish on it?

He told you there is massive duplicate R&D, he told you the ego in this industry is massive (himself included clearly), and he told you that they aren't gonna get anywhere close to WACC even in good times like this. How is this positive to the stock in any sense? And they are going to sink EVERY DOLLAR into CapEx until 2018 and investors won't see a single dime capital return -- while the company sports massive leverage -- and the worse thing is even with that it might not be enough. Fiat is going to go down 90%+ in the next crisis and will have existential issues when EV becomes competitive. Playing the cyclical is fine and we all do it, but this is not a good industry guys -- the stories are fascinating but, like Marchionne said, there really are better investments out there.

The labor union note is interesting, but I wonder why he is laying this deck out there -- who is it directed to? It's great information and I'm glad he did it, but I can't help but think it serves a greater purpose.

 

And the fight with the Bernstein analyst is kind of ridiculous. The call is a shit show really.

 

But what do I know. If anyone has insights on the next steps would greatly appreciate.

 

PS: Marchionne gets paid a lot. So I won't be surprised he is trying to talk up the stock / force a change in control to get himself paid. I respect the man for what he has done, but sometimes I find his aggression unnecessary (or perhaps he sees the dire future and is stressed out about it? That I can understand)

 

Re your points on the presentation: It obviously isn't positive for the stock that the auto biz is low-ROIC and capital intensive with big ego leaders. But you seem think that there were investors who didn't know that? I don't see how this is a variant perception. I thought the presentation was good because it taught me things about the industry I did not know before and gave me a better understanding of the investment and possible outcomes.

 

Managements assessment is that they need to invest every penny (and more) into capex to improve their competitive position and be a viable competitor in the future - and I agree. That's why they won't return capital or reduce leverage. You seem to view this as three separate issues, I see one cause and three effects. The leverage is at about 1xEBITDA. I wouldn't mind seeing it come down, but I don't think it is necessarily optimal to sit around with a net cash position of a third of your market cap either, like some of the competition. Do you think that a net debt position is unsustainable in auto manufacturing?

 

On EV, txlaw made a comment on Twitter that I agree with - I think what you will see is partnerships. And btw, FCA have EV vehicles. How long do first mover advantages in tech usually last in the auto industry?

 

Why he made the presentation? He wants to consolidate - the more people that know the benefits the more likely it is that something will happen. Whether it was directed to activists, other CEOs, analysts or regulators I will let other people decide. I don't see how it matters.

 

The suggestion that Marchionne is trying to "talk up the stock to get himself paid" I think is half-way crazy. A more plausible explanation for his sometimes aggressive replies I think is that his temperament is naturally that way + the fact that he works 100 hours a week doing one of the arguably more stressful jobs on the planet.

 

Thanks for raising the issues, always good to think about the other side of the argument. Guess this is what makes markets.

[Chalk bag]

Here you go. See attached.

 

I don't know why people are spooked by the negative reaction. I liked the name since 8 bucks but at this price the valuation is quite ahead. Why is everyone so bullish on it?

He told you there is massive duplicate R&D, he told you the ego in this industry is massive (himself included clearly), and he told you that they aren't gonna get anywhere close to WACC even in good times like this. How is this positive to the stock in any sense? And they are going to sink EVERY DOLLAR into CapEx until 2018 and investors won't see a single dime capital return -- while the company sports massive leverage -- and the worse thing is even with that it might not be enough. Fiat is going to go down 90%+ in the next crisis and will have existential issues when EV becomes competitive. Playing the cyclical is fine and we all do it, but this is not a good industry guys -- the stories are fascinating but, like Marchionne said, there really are better investments out there.

The labor union note is interesting, but I wonder why he is laying this deck out there -- who is it directed to? It's great information and I'm glad he did it, but I can't help but think it serves a greater purpose.

 

And the fight with the Bernstein analyst is kind of ridiculous. The call is a shit show really.

 

But what do I know. If anyone has insights on the next steps would greatly appreciate.

 

PS: Marchionne gets paid a lot. So I won't be surprised he is trying to talk up the stock / force a change in control to get himself paid. I respect the man for what he has done, but sometimes I find his aggression unnecessary (or perhaps he sees the dire future and is stressed out about it? That I can understand)

 

Re your points on the presentation: It obviously isn't positive for the stock that the auto biz is low-ROIC and capital intensive with big ego leaders. But you seem think that there were investors who didn't know that? I don't see how this is a variant perception. I thought the presentation was good because it taught me things about the industry I did not know before and gave me a better understanding of the investment and possible outcomes.

 

Managements assessment is that they need to invest every penny (and more) into capex to improve their competitive position and be a viable competitor in the future - and I agree. That's why they won't return capital or reduce leverage. You seem to view this as three separate issues, I see one cause and three effects. The leverage is at about 1xEBITDA. I wouldn't mind seeing it come down, but I don't think it is necessarily optimal to sit around with a net cash position of a third of your market cap either, like some of the competition. Do you think that a net debt position is unsustainable in auto manufacturing?

 

On EV, txlaw made a comment on Twitter that I agree with - I think what you will see is partnerships. And btw, FCA have EV vehicles. How long do first mover advantages in tech usually last in the auto industry?

 

Why he made the presentation? He wants to consolidate - the more people that know the benefits the more likely it is that something will happen. Whether it was directed to activists, other CEOs, analysts or regulators I will let other people decide. I don't see how it matters.

 

The suggestion that Marchionne is trying to "talk up the stock to get himself paid" I think is half-way crazy. A more plausible explanation for his sometimes aggressive replies I think is that his temperament is naturally that way + the fact that he works 100 hours a week doing one of the arguably more stressful jobs on the planet.

 

Thanks for raising the issues, always good to think about the other side of the argument. Guess this is what makes markets.

 

Compounding,

 

All fair points.

- You would be surprised regarding ROIC vs. WACC haha. The fast money I speak to (and a lot of sell-side analysts to be honest) rarely do that kind of analysis.

 

- Rather than saying a net debt position is unsustainable, I am sharing Sergio's frustration that they had to spend all these R&D that are necessary to survive, but are in essence unnecessary and duplicate. They have no choice but to do so JUST TO STAY WHERE THEY ARE-- and staying in cash they will die. So it's either die by doing nothing and hoarding cash, or by spending the dough and may have a chance (but implode in the next crisis that who knows when).  I would take the gamble too, but many I speak with seems to be unaware of the risk associated with either of these actions.

 

- Partnership / JV is not going to work. Even Sergio told you that. Apple decided not to "partner" because these Auto guys are too damn slow. Ultimately, his point (and the Bernstein analyst's point) is that all these CEOs are too stubborn to do anything together. I think you are right that, after seeing all the activism in the market, Sergio could believe that the involvement of activists will be a key agent of change. I am hopeful about that, but that is a tremendous uphill battle only pertaining to the most combative and non-compounding funds (i.e. since this is not a good business, guys like ValueAct likely won't get involved, but I could be wrong.)

 

- Regarding the tech point, I'm sure we are aware that grounds are shifting beneath our feet. A whole host of technologies are developed by the "outsiders" from the auto industry -- be it driverless cars by Google, the unknown car project by Apple, electric vehicles by Tesla and BYD, car-sharing apps like Uber, or 4-5G + radio technology. A few things are important about them (and why they could be so harmful to the existing players): they are not only backed by players with massive capital support, shareholder bases with much less regard to profitability, but also based on entirely different mindsets and technological platforms. It's not another factory that GM can just build, it is massive R&D, talent, time in an entirely different vertical and systems. They may look like toys now (well, they really are), but that's what creative destruction really looks like. Once they become some sort of a real product, I think it will be waaaay too late to do any catch up. Is the 2 Bn Fiat spending on Powertrains really going to matter in the new world? No, it's wasted and so is the other $20 Bn spent by other players. I think that's what Sergio is scared about the most: they need to stop wasting duplicated dollars, and work together by embracing R&Ds that are really important.

 

- Yeah, perhaps I'm too combative too on the pay package issue. Look what lack of sleep can do to you =). I'm glad he did this presentation like you did though.

[compounding]

Compounding,

 

All fair points.

- You would be surprised regarding ROIC vs. WACC haha. The fast money I speak to (and a lot of sell-side analysts to be honest) rarely do that kind of analysis.

 

- Rather than saying a net debt position is unsustainable, I am sharing Sergio's frustration that they had to spend all these R&D that are necessary to survive, but are in essence unnecessary and duplicate. They have no choice but to do so JUST TO STAY WHERE THEY ARE-- and staying in cash they will die. So it's either die by doing nothing and hoarding cash, or by spending the dough and may have a chance (but implode in the next crisis that who knows when).  I would take the gamble too, but many I speak with seems to be unaware of the risk associated with either of these actions.

 

- Partnership / JV is not going to work. Even Sergio told you that. Apple decided not to "partner" because these Auto guys are too damn slow. Ultimately, his point (and the Bernstein analyst's point) is that all these CEOs are too stubborn to do anything together. I think you are right that, after seeing all the activism in the market, Sergio could believe that the involvement of activists will be a key agent of change. I am hopeful about that, but that is a tremendous uphill battle only pertaining to the most combative and non-compounding funds (i.e. since this is not a good business, guys like ValueAct likely won't get involved, but I could be wrong.)

 

- Regarding the tech point, I'm sure we are aware that grounds are shifting beneath our feet. A whole host of technologies are developed by the "outsiders" from the auto industry -- be it driverless cars by Google, the unknown car project by Apple, electric vehicles by Tesla and BYD, car-sharing apps like Uber, or 4-5G + radio technology. A few things are important about them (and why they could be so harmful to the existing players): they are not only backed by players with massive capital support, shareholder bases with much less regard to profitability, but also based on entirely different mindsets and technological platforms. It's not another factory that GM can just build, it is massive R&D, talent, time in an entirely different vertical and systems. They may look like toys now (well, they really are), but that's what creative destruction really looks like. Once they become some sort of a real product, I think it will be waaaay too late to do any catch up. Is the 2 Bn Fiat spending on Powertrains really going to matter in the new world? No, it's wasted and so is the other $20 Bn spent by other players. I think that's what Sergio is scared about the most: they need to stop wasting duplicated dollars, and work together by embracing R&Ds that are really important.

 

- Yeah, perhaps I'm too combative too on the pay package issue. Look what lack of sleep can do to you =). I'm glad he did this presentation like you did though.

 

- You may be right about the fast money and sell-side analyst. I don't work in the industry so I guess I'm not really exposed enough to have a qualified opinion. I will say though that, if true, it's both surprising and encouranging at the same time :)

 

- I agree with you that it is frustrating. Only thing I would add is that FCA's capex and R&D spending at the moment is not all maintenance, as evidenced by their business plan and the actual results, i.e. they are growing, both into new segments in existing markets, and into new geographical areas. And I don't know if they will necessarily implode in the next crisis either, a lot of automakers made it through the last crisis - heck, even Fiat did. A large part of the thesis for me is that the restructuring done, especially in the US, will prevent a similar downside next time. GM recently presented their breakeven levels in NA and argued they would breakeven at a SAAR of 10-11 million, assuming a similar market share. And macro wise there should still be a fair bit of pent up demand left to satisfy.

 

- Sergio said partnerships/JV are not optimal or enough for sharing capital costs for the companies at large. In my view it's a different proposition developing new technology with someone to be able to meet new regulatory standards, at least in the short term. There are examples today of companies doing stuff together, FCA has some JVs and recently Tavares of PSA talked in the media about being open to include more partners in their partnership in Europe with Toyota to develop small cars. Most are probably too satisfied with how things are going at the moment to want to take the risks of full scale integration, partly due to the high profile failures of the past. Regarding the possibility of activists we don't have to look further than across the street at GM. But I agree with you that most activists would probably look to other types of businesses, preferably without large families that already own a large chunk of the stock (perhaps GM's fragmented owner base is one big reason it has only happened over there).

 

- I agree with your point on duplicated R&D and Sergio's view on it. However, a meaningful amount of capex and R&D is being spent by the incumbents on the stuff you talk about. Maybe not as much in the FCA house, but companies like GM, Renault-Nissan, Toyota, Hyundai-Kia and the germans are all spending a meaningful amounts keeping up. There is a reason the incumbents are so hard to disrupt in auto, and why Tesla was the first IPO since Ford in the US, and that is that the existing players are so extremely competitive... I think a lot of the discussion related to new tech underestimates the incumbents' ability to respond to these threats, even though I certainly could be wrong about this. Google and Apple seem more interested in supplying services and tech to the auto industry rather than competing in manufacturing, which is probably due to the lousy economics and the level of competition existing in the industry at large.

 

Anyway, thanks for your response - nice discussion.

[Packer16]

I see Marchionee as an Outsiders type of CEO so his style is not the same as others and is willing to call a spade a spade and not merrily go along with the consensus.  By doing what he is doing he is trying to change the economics of the business.  I think it has a decent chance of working.  The virtual mergers of Renault and Nissan and Fiat and Chrysler were first steps.  At this point there are a lot of skeptics so even if Fiat is marginally successful there is some upside.  I have also trimmed my position in the recent rally but I think this will be an interesting and entertaining ride from here.

 

Packer

[Sportgamma]

Marchionne never ceases to amaze me. Talk about creative problem solving. He's always been honest and outspoken but this is like watching Inception. It's going to be interesting to see if some of those seeds sprout.

[CorpRaider]

Dear Sirs,

 

    Bring back the legitimate Jeep Cherokee (maybe with a little bit more fuel efficiency).  The one that Liam Neeson drove through a trailer in Taken, not this morphed liberty stuff on the neon chassis. 

[ZenaidaMacroura]

FCAU redeemed senior secured notes that mature in 2019 with a total face value of $2.875 billion

http://finance.yahoo.com/news/fiat-chryslers-u-unit-redeems-115105018.html

 

@Corp Raider

I actually like the mean cherokee look!

[merkhet]

FCAU redeemed senior secured notes that mature in 2019 with a total face value of $2.875 billion

http://finance.yahoo.com/news/fiat-chryslers-u-unit-redeems-115105018.html

 

@Corp Raider

I actually like the mean cherokee look!

 

My girlfriend hates it for some reason. She says they look angry. She likes the Grand Cherokee though.

[nikhil25]

I thought this was an interesting read: Why Today’s Automobile Industry Looks A Lot Like IBM in 1985

http://techcrunch.com/2015/05/17/why-todays-automobile-industry-looks-a-lot-like-ibm-in-1985/#.rqmczb:5qxO

 

Also, Automatic (https://www.automatic.com/) seems to be doing some cool things --- some of them are comparable to GM's OnStar (Crash assistance etc.)

[brker_guy]

Say "hello" to your new Maserati spokemodel, guys!

 

http://www.si.com/swim-daily/2015/05/14/genevieve-morton-maserati-campaign

 

 

[txlaw]

A must read on Sergio:

http://www.nytimes.com/2015/05/24/business/detroits-chief-instigator.html

 

Interesting tidbit from the article -- Marchionne sent an email to Barra in March suggesting a merger.

[Grenville]

A must read on Sergio:

http://www.nytimes.com/2015/05/24/business/detroits-chief-instigator.html

 

Interesting tidbit from the article -- Marchionne sent an email to Barra in March suggesting a merger.

 

Terrific article and information!

 

Agreed a must read for any long term holders…Sergio ceases to amaze. Glad he doesn't fit the mold and shows flexible thinking.

[peter1234]

A must read on Sergio:

http://www.nytimes.com/2015/05/24/business/detroits-chief-instigator.html

 

Interesting tidbit from the article -- Marchionne sent an email to Barra in March suggesting a merger.

 

Terrific article and information!

 

Agreed a must read for any long term holders…Sergio ceases to amaze. Glad he doesn't fit the mold and shows flexible thinking.

+1. Thank you.

[investor-man]

Damodaran with some words about Marchionne

 

http://aswathdamodaran.blogspot.com/2015/05/no-light-at-end-of-tunnel-investing-in.html

 

[fareastwarriors]

Fiat Boss Too Cautious on Case for Industry Consolidation

 

 

http://www.nytimes.com/2015/05/28/business/dealbook/fiat-boss-too-cautious-on-case-for-industry-consolidation.html?ref=dealbook&_r=0

[goldfinger]

I wonder why Marchionne didn't ask Antony Curry his opinion before launching his merger campaign...?  ;D