FCAU - Fiat Chrysler Automobiles

[Guest ajc]

 

I've been buying a lot of this recently - does anyone have any thoughts on 1) Valuation 2) Upcming spinoff of MM, and 3) overall how the company is doing?  Also, what are the chances of other spinoffs?  I must admit, I didnt follow this story at all until marchionne's death - but WOW.  I cannot wait for the spinoff of MM...there also seems to be other businesses that do not make sense inside the broader Fiat complex

 

 

On valuation:

 

I think it's clearly the cheapest auto manufacturer based on the quality of its assets, balance sheet, and earnings potential.

Whether you do a sum of the parts breakdown or (preferably) an earnings-and-cash-in-the-bank analysis, FCA seems to easily be the best value pick of the well-known manufacturers.

The diesel-gate fine potential is an overhang, but as one COBF member sensibly pointed out in a recent Twitter conversation, Marchionne would not have been constantly reaffirming guidance each quarter if the penalty amounts they had been discussing at the negotiating table were unaffordable.

 

 

On the Magneti Marelli spin-off:

 

The low end valuation has been reported at about 6B euros. There have been estimates around 7B, and some on this board have suggested one closer to 10B.

At today's 21B euro market cap, that'd mean after a low-end separation you'd be left with a market cap of just 15B euros for the whole of Jeep, RAM, Maserati, and a few other brands.

That seems way off, and should invite a few prospective bidders. My take is the likes of Hyundai, Peugeot, Alphabet, private equity, and perhaps one or two others could be interested.

The spin-off has been slated to happen late this year or early next.

 

 

The company's overall performance:

 

Marchionne left the business in pretty phenomenal shape. They've got no net industrial debt or pension issues. I think they project 3B euros of cash in the bank by year-end, and with the Magneti spin that'll maybe be more like 5B or so, plus 7.5B euros of adjusted EBIT. Under Marchionne, they were targeting the best adjusted EBIT margins of the Detroit Three by year-end. Either way, they should be thereabouts under Manley.

The chances of other spin-offs, for the next few years, is low. Marchionne said that before he passed, and there's no reason to think Manley would go down that route until he'd had a few years to get a feel for the CEO's job.

 

 

On Manley's management (h/t no free lunch):

 

The point about Marchionne is well made, since he clearly had all the strengths you get with a great CEO. At the same time, the media has reported that Manley was his preferred pick and Manley also worked at FCA since Marchionne was appointed, so that's encouraging.

I also think there's a good chance Manley will listen to what Elkann has to say relatively closely, since Exor basically controls the board and Manley will want to build a strong friendship with him.

Given that, I'd speculate that Elkann would propose his own ideas on capital allocation, dividends, buybacks, or whatever, and so in that respect I think a chunk of Marchionne's capital allocation skills might not actually be disappearing after all.

Again, that's encouraging.

 

 

A few more thoughts:

 

I think holding an auto manufacturer through the cycle is crazy.

A Lynch-like approach where you're satisfied that you're getting enough value without stepping in front of steamrollers is, to my mind, the only reasonable one.

I think that means keeping a close eye on used car values, SAAR projections from all CEOs across various auto-related businesses, home construction numbers, oil prices and production, numerous major recessionary indicators, and (for now anyway) tariff issues.

If you cover all those aspects and conclude there's enough of a margin of safety in each one, I think you can say it's okay to sensibly invest in the most undervalued auto manufacturers.

I'd also add that if you google the Mexico NAFTA negotiations and the European ones, there seems to be more current potential for positive breakthroughs than is being widely acknowledged.

FYI, I find the most informative sources for auto sector and economic/recessionary insights to be https://twitter.com/DRuizG80 and https://fat-pitch.blogspot.com/ respectively.

 

 

Post-script:

 

I plan to gradually sell out of FCA sometime after the spin-off has been completed.

My original thesis was always to exit after Marchionne would've retired (April 2019), and while the auto market and economy were still clearly healthy based on the relevant data.

That timeline hasn't changed.

 

 

 

[kab60]

I agree on all of the above, but I struggle with this idea of timing the cycle. Scott Miller from Greenhaven seems to plan the same, and I don't think you two are alone. Quiet the opposite actually. Seems like people want to get out around the Magnelli spin. Is It doable? As in, if everyone does it, perhaps price gets so low (might be there already) that one might be much better off going long late cycle and live with a recession?

[kab60]

I mean, if you throw in a recession and normalize, isn't it still cheap? And if so, why not go long for the long term (unless it rerates much higher)?

 

I have no position because of the usual reasons but am long Auto Nation, so we're somewhat in the same boat.

[no_free_lunch]

Thanks so much AJC.  From the little I have read I do have a good feeling on Manley as far as ability to execute operationally but just not sure on his capital allocation skills.  He is supposed to be doing a conference call soon so there will be some info there.

 

I am with kab in that I won't even attempt to time the cycle and feel a trough is heavily priced in already.

 

Let me briefly diverge to wild speculation.  As background we all know there is this huge discrepancy between traditional auto companies and Tesla.  It feels a bit like the old / new economy of the late 90's.  However Tesla seems to be blowing up as we speak.  Maybe, just maybe investors will discover a little love for the forsaken auto companies if Tesla goes down.  At current prices FCAU does not require any of this to happen but it's fun to think about.

[Guest ajc]

 

@ kab60 and no_free_lunch

 

Ha. No disagreements here.

 

I mean, at a 15B euro market cap after a Magneti Marelli spin, it'll be trading at 3x 2018 earnings. 2x, if you assume they have 5B in the bank. So yeah, it's cheap as hell and can easily re-rate. Also, that large-scale momentum-to-value shift is in the mail. The data is relatively undeniable. That's another big possible catalyst for the stock.

 

From my side, the only reason I'll gradually be selling is I've made great returns in it the past 5 years and happen to have identified some management teams and businesses I think have the ability to generate long-term Marchionne-type results. Hehe, they also aren't in industries as shitty as the auto one.

 

So yeah, essentially I've been fortunate enough to do well with them and think I've found some non-auto people and businesses that could deliver similar CAGRs. I can't argue with the substance of what's been said. It's very cheap on most every measure, and its earnings power should ensure that for the next few years.

 

 

 

[wachtwoord]

 

From my side, the only reason I'll gradually be selling is I've made great returns in it the past 5 years and happen to have identified some management teams and businesses I think have the ability to generate long-term Marchionne-type results. Hehe, they also aren't in industries as shitty as the auto one.

 

 

You understand this makes people very curious. Willing to share those opportunities?

[DTEJD1997]

Hey all:

 

When I was a little kid, I can just barely remember Lee Iococca & the K-Car & Mini-van turn around of Chrysler. 

 

Fast forward through the decades and Chrysler has always been kind of a "problem child"...HOWEVER, think 3 things are radically different today:

 

1). The company is debt free...they may actually have a nice chunk of $$$$ in the bank in a few quarters...I don't know if Chrysler has EVER been debt free?

 

2). After the bankruptcy, they shed most of the pension obligations.  Anybody have information/confirmation of this?

 

3). They are making money, and making a TON of it.  Hard to gauge the P/E, but it is something 4 or 5 going forward.  I don't know if Chrysler has ever traded at this low of a P/E.

 

So if you look at these 3 items, it looks like Chrysler may be in a position it has NEVER been in before.  Thus, this time it really might be different?

[Guest ajc]

 

 

 

 

From my side, the only reason I'll gradually be selling is I've made great returns in it the past 5 years and happen to have identified some management teams and businesses I think have the ability to generate long-term Marchionne-type results. Hehe, they also aren't in industries as shitty as the auto one.

 

 

 

You understand this makes people very curious. Willing to share those opportunities?

 

 

 

 

Ha. Fair comment.

JD.com is one of the more well-known businesses. They do have capex requirements, but their industry isn't nearly as fragmented as the auto one. Also, they're expanding intelligently into new geographies and their growth runway is sizeable.

I started following them closely after they sold Tencent a 15% stake in 2014.

Richard Liu, the founder, still owns 15%+. They also have Walmart as shareholders and Alphabet too.

If you think about online/offline distribution questions in China, ASEAN, and the rest of the world, the picture of their likely growth path with those partners becomes clearer.

 

I'd also say management matters, and Liu has many of the qualities I look for in a founder.

The team he's hired to build out the business (AI, drones, luxury offerings, etc), have all been top notch.

Another thing I look for is years of making a lot of smart decisions day after day, month after month. In a fast-paced market like e-commerce, you want management to be expanding rationally but also at a good clip. My sense is JD.com has pulled off this very difficult balance better than almost anyone, and this got me more comfortable with the thesis.

 

That idea's been developing over 5 years though, so I don't think it'll necessarily seem clear to anyone.

That's one of the risks of sharing names. Sometimes a lot depends on what your area of focus is, and what you've witnessed over the past few years from management and the business. Anyway, it's one of the company's I think is attractively valued, with great management, and a really impressive runway.

Value Ventures did a good write-up on them a few years back (https://oraclefromomaha.wordpress.com/2016/05/05/jd-com-a-multi-decade-compounder/), for a little context.

Basically, it'd be opportunities of that scale.

 

 

 

[Guest ajc]

 

Anyway, back to FCA....

 

I thought this interview from earlier today with Council of Economic Advisers chairman, Kevin Hassett, on the status of the current Mexican NAFTA negotiations was more encouraging than not.

 

 

 

 

[QuesnelCap]

Hey all:

 

When I was a little kid, I can just barely remember Lee Iococca & the K-Car & Mini-van turn around of Chrysler. 

 

Fast forward through the decades and Chrysler has always been kind of a "problem child"...HOWEVER, think 3 things are radically different today:

 

1). The company is debt free...they may actually have a nice chunk of $$$$ in the bank in a few quarters...I don't know if Chrysler has EVER been debt free?

 

2). After the bankruptcy, they shed most of the pension obligations.  Anybody have information/confirmation of this?

 

3). They are making money, and making a TON of it.  Hard to gauge the P/E, but it is something 4 or 5 going forward.  I don't know if Chrysler has ever traded at this low of a P/E.

 

So if you look at these 3 items, it looks like Chrysler may be in a position it has NEVER been in before.  Thus, this time it really might be different?

 

Very good points/questions.

 

1. This is the strongest part of the bull thesis IMO, Fiat Chrysler is net cash. That's amazing. It is not like pre-08 where the chances of going back to go on the monopoly board were high. John Elkann is squarely focused on his family's legacy and after the difficulties he has gone through in 04 and 08, he seems to be obsessed with not going bankruptcy. But remember he has also separated the crown jewel (Ferrari) in order to further achieve this goal.

 

2. This is true, most of pension liabilities became equity ownership in Chrysler. Fiat did have to inherit 5B Euros of pension liabilities when they closed the deal for the remainder of Chrysler in 2014. They current pension liability stands at about 10B Euros for the company as a whole. Very manageable.

 

3. On an earnings basis it looks really cheap but I was recently reading some Li Lu and this quote really stood out to me "I think the value of a long-term investment comes ultimately from the value that the business has created over its existence". Basically how much cash is coming in and out of the business over its existence. Like I said on twitter we seem to do alot of mental gymnastics to avoid this basic fact (at least I do). I pulled up the cash flow statements from 2007 and noticed that only 5B Euros FCF had been produced by the operating businesses (Op Cash Flow minus Investing Cash Flows) from 2007-2017. 5B!!!! Now it is true that anytime during this period management could have stopped investing to meet increased demand (esp at Jeep/Ram) and it would have rained cash but they did not (probably wisely so in order to maintain market share and a larger FCF bounty than in the future). The 2018-2022 plan has roughly the market cap worth of cash (approx 20B Euros) coming out the business in the next 5 years.

 

So unless you have some high degree of certainty of how much free cash flow the equity holder will lay claim to post 2022 I think this one has to go into the too hard pile. Nobody can reasonably predict where we are in the cycle and I just read everything on www.waymo.com and wow I did not know just how much progress Google has made. Yes, I know FCA is Google's partner but this technology is just probably just licensed to all the automakers. How does that play out?

 

Another interesting data point, over $20B of capital has gone into Tesla since inception and it still  bleeds money. Sergio (RIP) said the future will be electric & commoditized. What are the chances that FCA will spend less than Tesla ($20B) post 2022 in this commoditized and electric future to just keep up? I think its probably going to be more.

 

Anyway to answer your questions I think this time is both different (Bankruptcy risk extremely low) and very much the same (capex needs, cloudy future, stage in cycle, etc).

 

Btw, I am long this but have been really trying to stress test my thesis in the past few weeks and have been coming up with more questions than answers to be honest and that's always a warning sign for me. This was one of the great post-08 investments after they got Chrysler for basically free but before Ferrari spinoff. But alot of people much smarter than me think otherwise so all thoughts welcome

[wachtwoord]

@ajc: thanks for the reply and link. Will definitely invest some time looking at it.

[Spekulatius]

I think a lot of the investment in electric cars will replace investment in ICE cars and will not be incremental. Investment in self driving car technology will be mostly incremental, simply because it is a new technology.

 

Most of TESLA losses come from manufacturing and the spent to build the infrastructure for a new car manufacturer, not from R&D. A big car company like BMW or Daimler or GM can afford the same R&D spent than TSLA does.

[whatdadil9]

Traditional OEMs spend 10 bn of R&D a year at least. Thats the idea behind consolidation. If two companies can spend twelve and you can get 5x 8 bn of duplicative r&d on same thing its enormous value creation.

 

Lets not forget about procurement savings -- maybe 2 pct of combined sales? that could be 4bn.  What about shared capex savings from sharing platforms?

 

That math is stupid.

 

It may not happen in my lifetime but I still think this can be rational oligopolistic industry long term...the moat will be scale and knowhow. the replacement cost of a combined F/FCA or FCA/GM is borderline irreplaceable by tech as a function of dollars in the ground.

[fareastwarriors]

Fiat Chrysler’s Cheapskate Strategy for the Future of Driving

 

https://www.bloomberg.com/news/articles/2018-08-21/fiat-chrysler-s-cheapskate-strategy-for-the-future-of-driving

[hardincap]

https://finance.yahoo.com/news/kkr-holding-talks-buy-fiats-143851627.html

 

[mwtorock]

https://finance.yahoo.com/news/kkr-holding-talks-buy-fiats-143851627.html

 

i would prefer spin off, no? the previous spin offs have proven to be good for shareholders.

[ValueMaven]

really depends what they do and how much they get for MM in terms of $$ and valuation.  If they can build a Financing unit/arm then bingo. 

[no_free_lunch]

I think a lot of the investment in electric cars will replace investment in ICE cars and will not be incremental. Investment in self driving car technology will be mostly incremental, simply because it is a new technology.

 

Most of TESLA losses come from manufacturing and the spent to build the infrastructure for a new car manufacturer, not from R&D. A big car company like BMW or Daimler or GM can afford the same R&D spent than TSLA does.

 

I am not an auto analyst but this makes a lot of sense to me.  Tesla was building general production facilities, whereas for an existing ICE manufacturer the body, paint, interior, suspension, and probably more would be re-used in a conversion to electric.

 

[Shooter MacGavin]

really depends what they do and how much they get for MM in terms of $$ and valuation.  If they can build a Financing unit/arm then bingo.

 

and have capital for share repurchases, and to invest in Maserati electrification, therefore potentially pull a Maserati spin forward.  A sale at a the right price is much better for these guys.

[mwtorock]

i just don't know if PE guys ever pay up. maybe this time it is different as there are potential synergies so they could pretend at least to be a strategic buyer.

[no_free_lunch]

I am not sure that current auto valuations are justifiable.  Global auto sales are at all time highs but then they have a tendency to be at all time highs.  If you look at the sales numbers and compare to say global GDP, I would say things are more less in line.

 

Global car/commercial vehicle sales:

2017 - 97M

2015 - 91M

2013 - 87M

2011 - 80M

2009 - 61M

2007 - 73M

2005 - 67M

2003 - 61M

2001 - 56M

http://www.oica.net/category/production-statistics/2017-statistics/

 

Global GDP:

2017 - 76T

2011 - 73T

2007 - 58T

2003 - 39T

2001 - 34T

http://www.multpl.com/world-gdp/table/by-year

 

Global Population:

2017 - 7.6B

2001 - 6.2B

 

 

So auto/commercial sales are up 73% from 2001 to 2017.

 

GDP is up 123%.

 

Population is up 22%.

 

It's a question of whether GDP or population is a better comparison for auto sales.  I tend to think GDP is more important as the people are already there, they just need to get richer to expand the pool of car buyers.  From 2001 to 2017 US auto sales have actually declined slightly so the sales are coming more from developing countries.  What is really happening is new markets are opening.  Based on the number I have seen, it doesn't seem like we are crazy cyclical highs for vehicles.  I'm sure they will decline for a year or 2 if there is a big recession / trade war but then the entire stock market will crash in that case.  Auto's might crash less, especially the ones near / below book.

 

I think there are valid concerns about government involvement and commodity like nature of these companies but I still think they are oversold.

 

FCAU looks good but I am also thinking about TM right now.  PE of 8, below book value, economies of scale, low defect vehicles, just a really solid company all around.  I am open to any other ideas.

[Cigarbutt]

I am not sure that current auto valuations are justifiable.  Global auto sales are at all time highs but then they have a tendency to be at all time highs.  If you look at the sales numbers and compare to say global GDP, I would say things are more less in line.

...

FCAU looks good but I am also thinking about TM right now.  PE of 8, below book value, economies of scale, low defect vehicles, just a really solid company all around.  I am open to any other ideas.

The numbers described by no_free_lunch made me go back to a file that has been updated for about 20 years.

1-the auto industry is cyclical

2-money can be made but most money can be made opportunistically

3-the incredible growth of China was not really expected in 2001 and now skews the numbers

 

For 1- and 2-

In the early 2000’s Fiat was close to bankruptcy and Chrysler went through a difficult reorganization in 2009. Combination of the two entities through a bold deal pushed by a genius gave rise to a great opportunity. Who could have predicted that? When looking at the 2001 file update, that didn’t seem to be in the cards. Another one I’ve been closely following for about 20 years in the parts and components component of the auto industry is Linamar (LNR.TO, separate thread). IMO this has been a greatly managed firm but, in the last 20 years, the only significant periods when investment money could have been made was for a brief period during the GFC and from 2013 to 2015. I would say it is very hard to play buy and hold here.

 

For 3-

Mr. Marchionne used to say that he preferred 1% market share in China versus 30% market share in Italy. I find FCAU has not been particularly successful in China (apart from surprising Jeep results) and this seems to be an important variable going forward.

 

To shine a light on no_free_lunch numbers:

 

Here is the percentage share of the growth in numbers mentioned,

Since 2001, the China share for growth in:

-population:  about 7%

-GDP: about 25%

-car sales: about 65% (!)

 

Since 2009, China’s share of GDP growth and car sales growth, respectively: about 45 to 50% and about 50 to 55%. China car sales account for 2/3 of global incremental sales in the last three years.

 

China barely produced or sold cars until the 1990’s and since then has accomplished one of the most dramatic industrial growth story in human history. The global future of the auto industry and FCAU has to correlate with future extrapolation of past trends. Since 2001 to today, car ownership in China has grown from about 10 to about 125 per 1000 civilians (for the US: about 800, for Europe: about 500).

 

Forgetting the unnecessary math or Gomperz concept which simply lays out scenarios of rising car ownership in China versus growing GDP and car ownership propensity, the numbers, even ignoring the sustainability issues, are simply staggering.

http://www.mdpi.com/2071-1050/6/8/4877/htm

Figures 3 and 5

 

Given that cycles are cycles and the unprecedented growth of emerging markets (mostly China), I would be careful with simple extrapolation of previous trends and at least discount the possibility of excess capacity in the context of rules of global trade being presently redefined.

 

From a 2004 official China industry report: "It is true that the demand for automobile in China is accelerating at a remarkable rate and seems to have no ceiling. It is also true, however, that not everyone will win."

[kab60]

One point on FCAU, that I didn't see discussed here but is in included in a large Berenberg analysis on Auto OEMs, is the negative WC. They point out the cash effect if/when cycle tur ns. Haven't looked into it but thought I'd point it out.

[merkhet]

How about FCAUs plan to be debt free. To me that doesn't make any sense (when interest rates are so low), i think debt-free capital structure would ultimately mean higher cost of (equity) capital and Debt-free FCAU will be even bigger capital junkie, than with appropriate amount of debt-financing (going against Sergios theory).

 

Think back to what happened to Ford in the GFC. They essentially got lucky in their timing. Right before the GFC, they decided they wanted to restructure the company, so they drew down on their credit lines to fund that transformation -- shortly thereafter, the world went to hell in a handbasket. If they had tried to draw down those credit lines during the crisis, would they have been able to do so?

 

Now, that was, obviously, an unprecedented scenario, and it's unlikely to recur to that extent in the near- and medium-term future. However, imagine if FCAU was net-debt, and there was between a moderate to severe downturn -- how likely are they to be able to access credit lines to stay afloat? That's the reason they want to be net cash. They don't want to be dependent on the kindness of credit markets if/when there's a downturn.

[whatdadil9]

BIG question..

 

In the three years since capital junkie, fca has spunoff race, about to spinoff MM, and margins are equal and about to surpass gm and way higher than ford.

 

If you are one of the double digit bn activist funds... why dont you push for a ipo of alfa /mas in light of aston mulitples or spin out -- given relationship with ferrair on power train and r&D can survive on its own.... and then partner with elkann to finally to oem consolidation. if MM sells for cash in theory FCA could do hostile of someone... F has a ton of net cash on BS... not crazy...

 

Not alot of cheap stocks for the big dogs out there. We get to around 1x EBIT ex marelli and normalized for ram product launch costs...