FCAU - Fiat Chrysler Automobiles

[Picasso]

GM said they need $20 billion as a cushion, so while it's net cash it's kind of not because even they know the next downturn can eat into that cash pile fairly quickly. There also seems to be new headwinds against them through ride sharing, electric, etc. All rlse equal, Fiat should trade lower than GM post spin.

 

I was thinking the only thing to cause a market multiple would involve better products/sales or a merger between Fiat and GM. Otherwise it's just getting paid to wait for the next downturn and hoping you bought in cheap enough. But a Fiat and GM merger could create a lot of value similar to LCC/AAL when those airline stocks traded at similar multiples.

[fareastwarriors]

Fiat Merger Mastermind Says Next Deal Could Be After He's Gone

 

http://www.bloomberg.com/news/articles/2016-01-04/fiat-merger-mastermind-says-next-deal-could-be-after-he-s-gone

[plato1976]

did you guys receive the ferrari shares in your account?

 

Fiat Merger Mastermind Says Next Deal Could Be After He's Gone

 

http://www.bloomberg.com/news/articles/2016-01-04/fiat-merger-mastermind-says-next-deal-could-be-after-he-s-gone

[fareastwarriors]

did you guys receive the ferrari shares in your account?

 

Fiat Merger Mastermind Says Next Deal Could Be After He's Gone

 

http://www.bloomberg.com/news/articles/2016-01-04/fiat-merger-mastermind-says-next-deal-could-be-after-he-s-gone

 

Most people did. Check out the RACE (Ferrari) thread.

[PLynchJr]

RACE shares still haven't shown up in my Fidelity accounts.

[karthikpm]

How is the cost basis for these RACE shares calculated?

[big_triece]

RACE shares still haven't shown up in Schwab either  >:(

[SwimmingNaked]

Im trying to wrap my head around Fiat and autos again as we enter this spin because I will have to think about selling RACE and buying FCAU. I look at GM quickly and its trading at ~6x adjusted earnings, generating FCF, and has a net cash position. I expect new FCAU to trade lower on a EV/EBITDA basis given the net debt and lack of FCF. As capital structure gets optimized and we see some continued growth and declining capex, the values should converge depending on your view of the portfolios.

 

But my fundamental question is what will cause the auto industry to re-rate higher? I mean GM looks solid and is trading pretty low. Maybe there is some litigation overhang and bankruptcy stigma. Or maybe people think we are at peak SAAR?

 

Im glad to sit on something that has CF yields in the teens but I am not sure what causes a rerating of the industry. And there still is some risk on hitting a FCF inflection point for FCAU.

 

With Fiat, you don't need valuations to re-rate to make good money. The valuation is that silly.

 

Net cash is possible, probably likely by end of '16. I don't think getting to net cash ASAP is that important, probably would help with valuation a little bit (but only to get it an EV multiple closer to GM). I'd rather Sergio buy a ton of stock if it continues to trade at ~3.5x conservative '16 EV/EBIT. It would take just 1 billion Euros to buy back 10% of the company right now, so I hope he backs up the truck because this is a joke valuation. Even if we used an EV/EBIT multiple of 7x, and assume 2 billion net debt by end of '16 and 8 billion pension, you get a double from current levels. 11 billion (~current mkt cap) + 2 net debt + 8 pension = 21 billion = EV. 6 billion in EBIT would be a pretty disappointing '16 given the unit expansion coming on, what's going on in Europe and continued improvement of N.A. margins. 21/6 = 3.5x. You could get down to 5 billion in EBIT which basically keeps EBIT flat yoy (this scenario is very hard to imagine), and it's still at 4.2x EV/EBIT. The industry as a whole doesn't have to rerate higher to make money here, Fiat is trading at a depressed valuation even relative to the industry and there are not really any good reasons for this (scandal, unsustainable leverage, poor forward prospects etc etc). Usually when EV is falling (like when a company delevers) and EBIT/EBITDA is rising, you get a big contraction in the forward EV/EBIT and EV/EBITDA multiples, and that's a really good time to make money if you think a company can deliver solid operational results. That's what will drive value creation for shareholders over the next year.

 

I'm not too concerned about "peak SAAR". Fiat's biggest market (N.A.) has SAAR at mean levels adjusted for population and a very old fleet age (further growth not likely but the cycle still has legs for several more years), Fiat's second biggest market (Europe) is just starting to come out of extremely depressed conditions and appears to be at beginning of a cyclical recovery (company is expanding capacity there at the perfect time) and Fiat is turning a profit in Latin America at or near the bottom of the cycle (due to its cost advantage in the region). There's a stigma from what happened in '08 which is contributing to depressed valuations, investors don't trust this industry, but they fail to recognize how the cost structure of the industry has changed and that cyclical downturns like what we saw in '08 are once in a generation type contractions rather than the norm (it was actually a good thing in the grand scheme of things that the industry went through that, in its older form it was unsustainable anyways). The two biggest risks I think about are, some sort of a huge recall which results in massive fines + all the other costs associated with it or something happening to Sergio, but "are we approaching peak SAAR?" is just not that big of a concern for me yet. You can value Fiat using trough multiples (because perception of peak SAAR will probably persist) and there's still a lot of upside.

 

Merger would really help everyone involved. Company becomes the undisputed industry king from its scale and can pour money towards future capex more effectively than its competitors (can spend more than anyone else, while also spending more efficiently than anyone else). Investors benefit from the company achieving better ROIC, greater resiliency during bad times, also puts pressure on other OEMs to pursue mergers which could lead to industry wide consolidation, all this would result in better valuation. Blue collars benefit as working under a stronger, more profitable company adds more security to their pensions and gives them more bargaining power in future labor negotiations. Only guys hurt by this would be the people working in the R+D departments and maybe some senior management who would either be redundant or have less power/influence in a bigger company, but it really makes all the economic sense in the world. Other than this, I wouldn't bet on multiples in the industry re-rating until the industry proves itself in a downturn or global macro sentiment turns bullish.

[jay21]

Thanks for the thoughts. That's basically what I thought the answer would be.

 

My point is more I understand why FCAU trades at a discount to GM but dont fully understand why GM trades at a low value (other than recall issues). I guess there isnt too much upside left for them in terms of top line/SAAR (maybe on margins). I understand the upside of FCAU.

 

Also two bear points:

 

- Hot auto debt market: If rates raise or charge offs pick up, how much will demand fall?

- Industry dynamics: Auto industry has historically been very bad. I believe in the restructuring that took place but am worried that the union gets more aggressive as profitability picks up and that someone starts going for share over profits. If one company starts doing it, then pricing could deteriorate industry wide.

[bbarberayr]

Called TD Canada - telling me Friday of Monday for the RACE shares.  Monday was the settlement date, so Thursday is t+3, so Friday probably, maybe Monday if slow.

[fareastwarriors]

How is the cost basis for these RACE shares calculated?

 

+1 Same question. Help?

[argonaut]

I suspect FCAU's investor relations dept will issue a statement shortly to help with this.

 

[SwimmingNaked]

 

My point is more I understand why FCAU trades at a discount to GM but dont fully understand why GM trades at a low value (other than recall issues). I guess there isnt too much upside left for them in terms of top line/SAAR (maybe on margins). I understand the upside of FCAU.

 

I think GM also has bit of a China overhang on top of the peak SAAR stuff (and general skepticism towards the industry). I've read sell side research literally say "valuation doesn't matter, exposure to China does"...I'm not joking, this is the quality of some of the analysis out there. I haven't studied GM in as much detail but from what I've read, even using bearish China assumptions, earnings for GM wouldn't change that much. But whenever there's a cloud hanging above a company or industry (however unjustified, and it IS unjustified in this case), it becomes a "show me" story and the market becomes less and less willing to pay for forward earnings and less and less willing to overlook one time charges. It's a funny place, the market, even in the auto industry, you have a stock that is priced with 5+ years of perfect high risk execution built in, with others you won't even get the benefit of a few months worth of low risk execution. Just let the company put up earnings, and the stock price will take care of itself, even without a rerating of multiples. Fiat is trading at 10 billion mkt cap when it can do 3+ billion in FCF this year (at a time when capex is elevated from more normalized levels and company is increasing CFO by the year, the divergence between capex and CFO will only increase over time as '16 is just the beginning of the FCF ramp up)...the only thing you can do is thank Mr. Market for providing us with an attractive opportunity and patiently wait to collect your money. Fiat right now is priced like it won't make it to 2020 and there's no good reason for it. FCF yield in the teens is nice, but 30+% (and increasing) is even better, and that's while getting the best management in the industry pursing what is a very sensible strategy focused on profitability + ROIC, and getting access to other low hanging sources of value creation (like deleveraging + more efficient capital structure + room for multiple to converge to peers + more room for operational efficiencies). I also don't trust GM's capital allocation, the 500 mil investment in Lyft seems foolish to me and the fact that the CEO doesn't even appear to be considering a merger is another red flag that she can't seem to grasp a very simple idea that would create enormous value for shareholders (though maybe the tune changes in a year or two once Fiat's balance sheet looks better). I will say though, that if Fiat wasn't even a bigger no brainer, I'd probably be in GM at this valuation.

[hyten1]

i see where you are coming from, however i would like to offer some slight variation on how you see things in regards to GM.

 

- lyft investment foolish? i leaning slightly to "no". uber and lyft they probably don't care where/who they get the cars from (with obvious some exception). so i think its important for a automaker to have a say in the car sharing space. especially in the car sharing space, because people who share cars care less about what car is being use, which commoditize the automakers, which i believe is not good for the automakers unless they are front and center. investing in lyft is a way to secure that in some ways. how many of these car sharing service does one need or app will people download and the scale advantage. at the end of the day i think its important for an automaker to get in on this not be left behind and just become a commodity car provider.

 

- as for merger with fcau? why should GM do it? i don't think barra said she won't consider it, GM said they did their analysis and its not to GM's benefit. i agree with GM, the merger  is not necessary now (take away focus from all the other things GM needs to do, considering the changes in the industry).  GM probably has the scale / technology it needs. I can see why  FCAU would like to merge with someone like GM, but from GM's perspective i see less of a benefit. Scale GM has, technology GM is more advanced, what else??? cost cutting sure maybe you can cut some cost but the risk outweighs the rewards right now for GM imho.

 

 

 

 

 

My point is more I understand why FCAU trades at a discount to GM but dont fully understand why GM trades at a low value (other than recall issues). I guess there isnt too much upside left for them in terms of top line/SAAR (maybe on margins). I understand the upside of FCAU.

 

I think GM also has bit of a China overhang on top of the peak SAAR stuff. I've read sell side research literally say "valuation doesn't matter, exposure to China does"...I'm not joking, this is the quality of some of the analysis out there. I haven't studied GM in as much detail but from what I've read, even using bearish China assumptions, earnings for GM wouldn't change that much. But whenever there's a cloud hanging above a company or industry (however unjustified, and it IS unjustified in this case), it becomes a "show me" story and the market becomes less and less willing to pay for forward earnings and less and less willing to overlook one time charges. It's a funny place, the market, even in the auto industry, you have a stock that is priced with 5+ years of perfect high risk execution built in, with others you won't even get the benefit of a few months worth of low risk execution. Just let the company put up earnings, and the stock price will take care of itself, even without a rerating of multiples. Fiat is trading at 10 billion mkt cap when it can do 3+ billion in FCF this year (at a time when capex is elevated from more normalized levels and company is increasing CFO by the year, the divergence between capex and CFO will only increase over time as '16 is just the beginning of the FCF ramp up)...the only thing you can do is thank Mr. Market for providing us with an attractive opportunity and patiently wait to collect your money. Fiat right now is priced like it won't make it to 2020 and there's no good reason for it. FCF yield in the teens is nice, but 30+% (and increasing) is even better, and that's while getting the best management in the industry pursing what is a very sensible strategy focused on profitability + ROIC, and getting access to other low hanging sources of value creation (like deleveraging + more efficient capital structure + room for multiple to converge to peers + more room for operational efficiencies). I also don't trust GM's capital allocation, the 500 mil investment in Lyft seems foolish to me and the fact that the CEO doesn't even appear to be considering a merger is another red flag that she can't seem to grasp a very simple idea that would create enormous value for shareholders (though maybe the tune changes in a year or two once Fiat's balance sheet looks better). I will say though, that if Fiat wasn't even a bigger no brainer, I'd probably be in GM at this valuation.

[muscleman]

i see where you are coming from, however i would like to offer some slight variation on how you see things in regards to GM.

 

- lyft investment foolish? i leaning slightly to "no". uber and lyft they probably don't care where/who they get the cars from (with obvious some exception). so i think its important for a automaker to have a say in the car sharing space. especially in the car sharing space, because people who share cars care less about what car is being use, which commoditize the automakers, which i believe is not good for the automakers unless they are front and center. investing in lyft is a way to secure that in some ways. how many of these car sharing service does one need or app will people download and the scale advantage. at the end of the day i think its important for an automaker to get in on this not be left behind and just become a commodity car provider.

 

- as for merger with fcau? why should GM do it? i don't think barra said she won't consider it, GM said they did their analysis and its not to GM's benefit. i agree with GM, the merger  is not necessary now (take away focus from all the other things GM needs to do, considering the changes in the industry).  GM probably has the scale / technology it needs. I can see why  FCAU would like to merge with someone like GM, but from GM's perspective i see less of a benefit. Scale GM has, technology GM is more advanced, what else??? cost cutting sure maybe you can cut some cost but the risk outweighs the rewards right now for GM imho.

 

 

 

 

 

My point is more I understand why FCAU trades at a discount to GM but dont fully understand why GM trades at a low value (other than recall issues). I guess there isnt too much upside left for them in terms of top line/SAAR (maybe on margins). I understand the upside of FCAU.

 

I think GM also has bit of a China overhang on top of the peak SAAR stuff. I've read sell side research literally say "valuation doesn't matter, exposure to China does"...I'm not joking, this is the quality of some of the analysis out there. I haven't studied GM in as much detail but from what I've read, even using bearish China assumptions, earnings for GM wouldn't change that much. But whenever there's a cloud hanging above a company or industry (however unjustified, and it IS unjustified in this case), it becomes a "show me" story and the market becomes less and less willing to pay for forward earnings and less and less willing to overlook one time charges. It's a funny place, the market, even in the auto industry, you have a stock that is priced with 5+ years of perfect high risk execution built in, with others you won't even get the benefit of a few months worth of low risk execution. Just let the company put up earnings, and the stock price will take care of itself, even without a rerating of multiples. Fiat is trading at 10 billion mkt cap when it can do 3+ billion in FCF this year (at a time when capex is elevated from more normalized levels and company is increasing CFO by the year, the divergence between capex and CFO will only increase over time as '16 is just the beginning of the FCF ramp up)...the only thing you can do is thank Mr. Market for providing us with an attractive opportunity and patiently wait to collect your money. Fiat right now is priced like it won't make it to 2020 and there's no good reason for it. FCF yield in the teens is nice, but 30+% (and increasing) is even better, and that's while getting the best management in the industry pursing what is a very sensible strategy focused on profitability + ROIC, and getting access to other low hanging sources of value creation (like deleveraging + more efficient capital structure + room for multiple to converge to peers + more room for operational efficiencies). I also don't trust GM's capital allocation, the 500 mil investment in Lyft seems foolish to me and the fact that the CEO doesn't even appear to be considering a merger is another red flag that she can't seem to grasp a very simple idea that would create enormous value for shareholders (though maybe the tune changes in a year or two once Fiat's balance sheet looks better). I will say though, that if Fiat wasn't even a bigger no brainer, I'd probably be in GM at this valuation.

 

This reminds me of Kirkorian's investment in 2006 and he advised that GM team up with Renault. GM hired investment bankers and told them to come up with a conclusion that this would not be beneficial, so the investment bankers came up with exactly that conclusion, and GM decided not to move forward.

 

Same thing over and over again.  :) Do you really think the IBankers would piss off GM and come up with a conclusion that GM's CEO does not like? You never piss off people who pay you.

[SwimmingNaked]

 

- lyft investment foolish? i leaning slightly to "no". uber and lyft they probably don't care where/who they get the cars from (with obvious some exception). so i think its important for a automaker to have a say in the car sharing space. especially in the car sharing space, because people who share cars care less about what car is being use, which commoditize the automakers, which i believe is not good for the automakers unless they are front and center. investing in lyft is a way to secure that in some ways. how many of these car sharing service does one need or app will people download and the scale advantage. at the end of the day i think its important for an automaker to get in on this not be left behind and just become a commodity car provider.

 

I am not a ride sharing industry expert so take what I say with a grain of salt. I can buy Uber’s viability, the proposition is clear and enough people are using it/are aware of it (whether the valuation it is getting is appropriate is a different question). The concept of Lyft does not seem as viable to me. There's a lot of utopian thinking going on with this ride sharing stuff and if GM shareholders are going to see a return on this investment it is going to be a long, long time. The companies involved are undoubtedly going to sell/hype the most extreme scenario because it helps them achieve loftier valuations which allows them to raise more cash. In part, the justification for the Lyft investment appears to be that it's a way to "hedge" potential disruptive impact that the company could have on the OEMs. But the potential % impact it could have on overall car sales appears to me, so insignificant, that this argument is not a very good one. The industry that is being displaced and seeing major disruption is the taxi industry (and maaybe car rental eventually), not the OEMs. Anyone who can actually afford to buy a car is not going to deal with the inconvenience of not having one by depending on a ride sharing service. I would not consider it even if the economics made sense, there's a different kind of value and convenience that car ownership brings. In urban environments (major downtowns) it might make sense, but why would someone use Lyft when Uber or a taxi is available? I know lots of people using Uber but not a single one who uses Lyft. What compels an Uber user to use Lyft? There's a big possibility that Lyft might have come too late to a winner take all party. Lyft is enjoying its valuation because of the success of Uber and the people putting money into Lyft appear to be chasing a concept that they missed out on. I guess you can look at this as an option of sorts, maybe its worth nothing, maybe its worth a lot, and 500 mil in context of the company’s BS position + FCF generation isn’t that big of a deal, but when I see management buying into hyped concepts and the reasons underpinning the investments not really being that strong or rational, I distrust their overall capital allocation ability. They are the types who will end up throwing cash at whatever bullshit money burning concept comes their way, provided you can scare them enough with the word "disruption". You could also go into how they might be pissing a lot of money away by being too aggressive (and too early) with some of their electric car concepts and with autonomous technology that could potentially be best developed and provided by a tech company (google), but that's a longer discussion.

 

- as for merger with fcau? why should GM do it? i don't think barra said she won't consider it, GM said they did their analysis and its not to GM's benefit. i agree with GM, the merger  is not necessary now (take away focus from all the other things GM needs to do, considering the changes in the industry).  GM probably has the scale / technology it needs. I can see why  FCAU would like to merge with someone like GM, but from GM's perspective i see less of a benefit. Scale GM has, technology GM is more advanced, what else??? cost cutting sure maybe you can cut some cost but the risk outweighs the rewards right now for GM imho.

 

Why should GM do it? I think looking at the valuations OEMs are getting on the market could be a starting point. The most unsavoury aspect of the OEM business is the capital consumption and you can directly address that problem with a well thought out merger. GM is loaded with cash and I agree, it can comfortably meet its capex needs, but you can dramatically lower the % of cash you're generating that goes towards reinvestment needs and do it while also spending more than any of your competitors, how does that not make all the economic sense in the world? I can somewhat understand why GM rebuffed FCA's proposition, right now Fiat is the most indebted major automaker, appears to be in midst of a strategic plan that seems ambitious to many people (though each passing year, the plan appears less ambitious, and more realistic), and from GM's perspective it is understandable that they might think that merging with a company with these characteristics adds unnecessary risk to their business. But as Fiat continues to deliver, it takes this line of reasoning away. I think Sergio understands this, that he can "de-risk" a merger from the perspective of GM with continuous improvement of the balance sheet and FCF generation. It takes the "bailout" argument away. At that point, there really ends up being no justification for denying a merger unless you really enjoy wasting money. The reasons are pretty simple. Company becomes the king of the industry. Investors benefit. Workers benefit. Some senior management don't. Other companies in the industry seem to understand the attractiveness of a big merger and from recent comments, it appears Sergio has been approached by them, but he realizes that it is better to hold out for the ideal partner. Like you mentioned, risk reward from GM's perspective needs to improve further and over time, it will.

[JayGatsby]

In urban environments (major downtowns) it might make sense, but why would someone use Lyft when Uber or a taxi is available? I know lots of people using Uber but not a single one who uses Lyft. What compels an Uber user to use Lyft?

People use Lyft when it has less surge pricing than Uber. Not sure that's a great business model, but there's probably room for both. Most of the drivers seem to use both, or at least most of the Lyft drivers also do Uber.

 

Seems like the self-driving car technology is more of the disruptor than the car sharing app. Seems every company today wants to have their own Venture group. Even venture companies have venture funds.

[TwoCitiesCapital]

In urban environments (major downtowns) it might make sense, but why would someone use Lyft when Uber or a taxi is available? I know lots of people using Uber but not a single one who uses Lyft. What compels an Uber user to use Lyft?

People use Lyft when it has less surge pricing than Uber. Not sure that's a great business model, but there's probably room for both. Most of the drivers seem to use both, or at least most of the Lyft drivers also do Uber.

 

Seems like the self-driving car technology is more of the disruptor than the car sharing app. Seems every company today wants to have their own Venture group. Even venture companies have venture funds.

 

Yea - the majority of people I know in NYC use Uber or a yellow cab. They will use Lift or Get for promotional pricing, to avoid Uber surge pricing, or when it's a long wait for an Uber/YellowCab. Lyft and Get seem to play second fiddle and are only used as cheaper alternatives at very limited times.

 

Most drivers I've seen have most, if not all, of the mobile taxi apps. There's no downside to a driver having 5 different services that he can potentially generate revenue from.

[bonkers]

http://www.wsj.com/articles/autonation-ceo-sees-slowdown-in-premium-luxury-cars-1452080663

http://news.investors.com/business/010616-788347-autonation-warns-of-gross-profit-drop.htm?ref=MoreArticles

http://www.nasdaq.com/article/autonation-ceo-sees-slowdown-in-highend-luxury-cars--2nd-update-20160106-00843

 

End-of-year sales figures are out, with some comments from e.g. AutoNation’s CEO Mike Jackson. Basically he said that December was in fact not that good. He might have the experience to judge, but I don’t see it that threatening. My take on it:

 

1) Poor sales performance AND the high incentives seems to have been concentrated in the luxury car segment (as we saw with already Maserati Q3), with more BMWs and Mercedes brought to U.S. instead of slowing China. I wonder if international car supply chains are this adaptable?

 

2) I do not have the data, but most likely car manufacturers have lowered the incentives all the time in this strong market. Perhaps he is just whining about dealers’ level already getting too low?

 

AutoNation has had a very stable gross margin of 15.7 %, the the on-average-300-$-extra-discount means for FCAU’s average price 0.9 %-points. And AN said they are adjusting pricing and cutting costs by Q2 so seems like an easy fix.

 

Also I find his comparison to year 2000 and the following few years “of good sales but deteriorating profits” premature. After 1990s there was no pent-up demand, now there is (and I bet it is still not fully consumed). The key issue will remain if car companies can now limit production early, and keep pricing discipline. (They claim they have learned the lesson, but I doubt it.)

 

As for the luxyry situation and if it remains, the bad thing will be uphill battle for (luxury) Maserati and Alfa when they try to increase their sales volumes in 2016. To me it feels unlikely that they become the hoped-for export success from Italy to U.S. & China. Let’s see what Marchionne says later this month.

 

My interest is in the overall market, and if FCAU keeps gaining at least little market share without foolish incentives. Would anyone have hard data on FCAU’s incentives vs. competitors?

[karthikpm]

RACE shares are in my account. No cost basis information is shown

 

 

[bbarberayr]

Mine were received as a stock dividend at $46.64 per share.  The FCAU price was not adjusted downwards.

 

[bbarberayr]

Now that FCAU has been spun out, if I look at the tier 2 manufacturers by volume, I show the market cap and EV below.  There definitely is upside to FCAU assuming they can get their margins up to their competitors:

 

 

FCAU $10B EV $21B

Ford $50B; EV $154B

Nissan $41B; EV $92B

Honda  $53B; EV $96B

 

Sales are at https://en.wikipedia.org/wiki/Automotive_industry#By_manufacturer

[TwoCitiesCapital]

Mine were received as a stock dividend at $46.64 per share.  The FCAU price was not adjusted downwards.

 

Same here. Looking at a slight capital loss for FCAU at this point and a 0.00 cost basis on RACE.

[big_triece]

http://www.wsj.com/articles/fiat-chryslers-goal-for-alfa-romeo-slipping-1452335407

[nikhil25]

Sergio lecture at York University - http://youtu.be/8U_mkqG9rC8

I thought the Q&A (~52:55) was really insightful - not sure if he has fully closed the doors on a potential deal with GM...