FCAU - Fiat Chrysler Automobiles

[phil_Buffett]

http://www.fcagroup.com/investorday/PresentationList/Five-Year_Financial_Targets-RP_May_6.pdf

 

financial Targets for 2018

 

global sales 2018: 7mio cars

 

 

Revenue 2018: 132b€

 

net Profit: 5b€ or 4€ per share

 

 

 

[Chalk bag]

Went through the slides and the presentation.

This is gambling! Not like they have any choices. What if another economic crisis hits in 2016-17? With the leverage they have the Co is going to be in deep doodoo. Frustrating.

[txlaw]

Talk about shooting for the moon.  4 EUR in profit per share and virtually no industrial net debt after 5 years.

 

I'm a bit nervous about this, but if Marchionne can deliver, his tenure will go down as one of the greatest ones ever in business (and investing).

[ZenaidaMacroura]

It's really ambitious...

 

I feel like if they run into another financial crisis they will have to think hard about spinning off some of their cherished brands (ferrari).

 

I was wondering why most board members were investing in fiat?  Is it the portfolio of brands?  Maserati, and ferrari are crown jewels, and chryster's refreshed lineup looks promising, or is the thesis the turnaround? 

[Palantir]

I am in because I find the FCF yield attractive, and ferrari/maserati has nice upside.

[Chalk bag]

I am in because I find the FCF yield attractive, and ferrari/maserati has nice upside.

 

Not sure if you are serious. There will be NO FCF until 2018! They said it -- going to plow everything into R&D + CapEx! This is binary as hell as a levered equity as is, and they are making it even more so. I have no question that if the world is fine in 2018 and they nail every execution step, the stock is gonna be @ 30+ Euro; but what if something goes wrong? Cash Flow dries up and they are already squeezing their working capital and the company can seriously go belly up.

[karthikpm]

Wow! Tall order and  seems very ambitious . I was hoping for less Capex, more integration - cost savings across brands translating to profitability. May have been fooling myself . Pretty certain they cannot deliver on all of these.. If they did, it would get the stock to 30 Euro - in the event of not meeting 10% CAGR in volumes in the next 4-5 years- wonder what the range of possible outcomes are . I can see atleast one bet they will face bankruptcy yet again..

[Chalk bag]

Wow! Tall order and  seems very ambitious . I was hoping for less Capex, more integration - cost savings across brands translating to profitability. May have been fooling myself . Pretty certain they cannot deliver on all of these.. If they did, it would get the stock to 30 Euro - in the event of not meeting 10% CAGR in volumes in the next 4-5 years- wonder what the range of possible outcomes are . I can see atleast one bet they will face bankruptcy yet again..

 

I think it is prudent to reduce exposure. Here is the reason:

 

While the catalyst component is unchanged, my original bull thesis is also predicated on:

 

- CEO will talk merger synergies and margin expansion in a material way.

- Capital spending intensity will decline after 2016 and Fiat will achieve meaningful FCF.

- LatAm will not suffer materially negative EBIT margins despite weakness.

 

I was wrong. It turns out that the above were not realized. Marchionne talked about the cost savings but places not enough emphasis on it. He is also adamant about pushing the capital spending plan into 2017 to realize the game-plan for Alpha Romeo, thus terming out FCF. Finally, the 1Q LatAm print at weak trading profit margins (and negative EBIT margin) could spell much trouble to come before its Jeep plant opens up in 2015.

 

All in, the next 5-year plan paints a picture that terms out free-cash-flow and places much emphasis on execution. What this means is that the management team is exchanging bird on hand (FCF) to birds-in-the-woods (future FCF post-2017) in the ambition to be a sizable player. I cannot blame them (since it is pretty much the only way they can remain relevant), but I have misjudged how much capital is needed. This game plan makes the investment much more binary and SAAR-dependent than I had hoped, and while the print is by no-means horrendous, I believe the respective risk-tolerance should be toned down respectively.

 

I will personally still keep some -- I believe the October catalyst is still in-tact and sell-side may come out with bullish thesis given the management -5yr guidance (which is very, very blur-sky bullish and not unachievable if execution checks-out, but it’s 1 side of the count and should not be the cornerstone of an INVESTMENT thesis.).

 

[Packer16]

Maybe I am missing something but why would you invest in Fiat, GM or any car company for that matter if you thought we were at the end of the SAAR cycle?  Isn't part of the thesis that we are in early/mid SAAR cycle and we have more replacement demand to boost sales?

 

Packer

[krazeenyc]

Wow! Tall order and  seems very ambitious . I was hoping for less Capex, more integration - cost savings across brands translating to profitability. May have been fooling myself . Pretty certain they cannot deliver on all of these.. If they did, it would get the stock to 30 Euro - in the event of not meeting 10% CAGR in volumes in the next 4-5 years- wonder what the range of possible outcomes are . I can see atleast one bet they will face bankruptcy yet again..

 

I think it is prudent to reduce exposure. Here is the reason:

 

While the catalyst component is unchanged, my original bull thesis is also predicated on:

 

- CEO will talk merger synergies and margin expansion in a material way.

- Capital spending intensity will decline after 2016 and Fiat will achieve meaningful FCF.

- LatAm will not suffer materially negative EBIT margins despite weakness.

 

I was wrong. It turns out that the above were not realized. Marchionne talked about the cost savings but places not enough emphasis on it. He is also adamant about pushing the capital spending plan into 2017 to realize the game-plan for Alpha Romeo, thus terming out FCF. Finally, the 1Q LatAm print at weak trading profit margins (and negative EBIT margin) could spell much trouble to come before its Jeep plant opens up in 2015.

 

All in, the next 5-year plan paints a picture that terms out free-cash-flow and places much emphasis on execution. What this means is that the management team is exchanging bird on hand (FCF) to birds-in-the-woods (future FCF post-2017) in the ambition to be a sizable player. I cannot blame them (since it is pretty much the only way they can remain relevant), but I have misjudged how much capital is needed. This game plan makes the investment much more binary and SAAR-dependent than I had hoped, and while the print is by no-means horrendous, I believe the respective risk-tolerance should be toned down respectively.

 

I will personally still keep some -- I believe the October catalyst is still in-tact and sell-side may come out with bullish thesis given the management -5yr guidance (which is very, very blur-sky bullish and not unachievable if execution checks-out, but it’s 1 side of the count and should not be the cornerstone of an INVESTMENT thesis.).

 

 

Assuming that you have quality management in place, having ambitious goals does not mean that they won't pivot as circumstances change. Given Fiat's position in the market, investing to grow their luxury brands (this is going to be where the profit is going to be) makes a lot of sense to me.

 

I also don't think this is nearly as binary as you portray things. They may be able to revive Alfa Romeo, while Fiat might not do as well, or vice versa. I definitely don't think it's all or nothing here.

 

FWIW, I assume the 5 year plan is aspirational.

[fareastwarriors]

kepler cheuvreux

 

 

Reduce

 

Target price

EUR 6.40

Kepler_Cheuvreux_-_Fiat_-_Reduce.pdf

[MYDemaray]

What if another economic crisis hits in 2016-17?

 

Marchionne addressed this during the call. His answer was that the plan only calls for two capacity expansions -- Brazil (I think) and China. He said they would simply ratchet back the capex and wait it out. He used Europe as an example and said that their willingness to stop spending during the crisis - though criticized - allowed them to keep from raising capital.

 

Not sure if you read "Once Upon A Car", but this interaction stood out to me.

 

All through lunch Marchionne questioned him: What was Chrysler's plan? Why had Cerberus bought the company? What did it need to succeed....

...Marchionne looked at him and got very serious. "Can you survive if sales in the U.S. go below ten million a year" he said bluntly.

LaSorda wasn't sure he heard right. Annual sales hadn't dropped below ten million in the American car market for twenty-five years. For the past five, it had been well above sixteen million. Marchionne was talking about a 40 percent drop -- not exactly possible.

"We're pretty sure we're going to be around fourteen, fifteen million,"LaSorda said. "And we'll be fine at that."...

"Tom, let me tell you something," he said. "I'm a lot more negative about future sales volumes than you are. In fact, the numbers you are talking about are outlandish. If you think your salvation is coming from the market numbers, you're wrong. You have to be able to bleed to death at ten million to make it."

 

Will those words come back to haunt Marchionne -- or are they an indication of his paranoia and survival instincts? In the end, you are betting on his judgment -- to pull back on capex and preserve the enterprise should it come to that.

[Palantir]

I am in because I find the FCF yield attractive, and ferrari/maserati has nice upside.

 

Not sure if you are serious. There will be NO FCF until 2018! They said it -- going to plow everything into R&D + CapEx! This is binary as hell as a levered equity as is, and they are making it even more so. I have no question that if the world is fine in 2018 and they nail every execution step, the stock is gonna be @ 30+ Euro; but what if something goes wrong? Cash Flow dries up and they are already squeezing their working capital and the company can seriously go belly up.

 

You are quite right, but I was thinking about the new plan as growth capX. It is also possible that you are more knowledgeable than me about this company, and your concerns are justified. :)

[Spekulatius]

Alfa presentation, wow.

 

The Alfa presentation seems like a joke to me. I agree with Chalk Bag that this LT plan does not look that great  - just too heavily backend loaded. Great if they can pull it off, but I think there is a 50% chance that this is going to be a zero.

[sleepydragon]

some of the most successful business men had big goals that most other people thought impossible. many real examples. steve jobs and iPod, Elon musk and his rockets, intel and moore's law, microsoft and personal computer.

 

 

[karthikpm]

some of the most successful business men had big goals that most other people thought impossible. many real examples. steve jobs and iPod, Elon musk and his rockets, intel and moore's law, microsoft and personal computer.

 

 

 

Each of these people had a new or different product, making cars /auto is a capital intensive low quality business and not quite the same

 

That said, I think getting to the IPO in october is a definite catalyst

[jay21]

Are there any assumptions in particular that people feel are overly ambitious?

 

Sales volume going from 4.4 to 7.0 for an increase of 2.6.  Jeep will account for 1.2 of that increase.  Geographically, APAC accounts for .9.  Maybe Jeep is aggressive?

 

I think that the Euro market may have bottomed so I don't have a problem with their Fiat increase of .4. Chrysler will launch a few new models so it makes sense they gain some volume.

 

IDK, Jeep might be the only one that looks somewhat unrealistic, but China and foreign markets should provide solid growth.  What are people thinking is unrealistic?

[wbr]

Are there any assumptions in particular that people feel are overly ambitious?

 

Sales volume going from 4.4 to 7.0 for an increase of 2.6.  Jeep will account for 1.2 of that increase.  Geographically, APAC accounts for .9.  Maybe Jeep is aggressive?

 

I think that the Euro market may have bottomed so I don't have a problem with their Fiat increase of .4. Chrysler will launch a few new models so it makes sense they gain some volume.

 

IDK, Jeep might be the only one that looks somewhat unrealistic, but China and foreign markets should provide solid growth.  What are people thinking is unrealistic?

 

People think Alpha Romeo is unrealistic. Jeep is a very iconic brand that has already some traction, so the growth assumptions seem ok (same for Maserati imo). As you said for the Fiat brand growth assumptions might be on the low end (most of it in APAC, but almost nothing in Europe).

The problem with Alpha is the lack of brand equity and models, so a lot of marketing and R&D spending is needed and the timeframe seems a bit short.

 

And the most important question is how Fiat is going to pay for all of this.

[Phaceliacapital]

I think the deleveraging is ambitious.

[jay21]

Are there any assumptions in particular that people feel are overly ambitious?

 

Sales volume going from 4.4 to 7.0 for an increase of 2.6.  Jeep will account for 1.2 of that increase.  Geographically, APAC accounts for .9.  Maybe Jeep is aggressive?

 

I think that the Euro market may have bottomed so I don't have a problem with their Fiat increase of .4. Chrysler will launch a few new models so it makes sense they gain some volume.

 

IDK, Jeep might be the only one that looks somewhat unrealistic, but China and foreign markets should provide solid growth.  What are people thinking is unrealistic?

 

People think Alpha Romeo is unrealistic. Jeep is a very iconic brand that has already some traction, so the growth assumptions seem ok (same for Maserati imo). As you said for the Fiat brand growth assumptions might be on the low end (most of it in APAC, but almost nothing in Europe).

The problem with Alpha is the lack of brand equity and models, so a lot of marketing and R&D spending is needed and the timeframe seems a bit short.

 

And the most important question is how Fiat is going to pay for all of this.

 

They only expect to sell .4 of Romeo by 2018.  Given the investment, this seems unreasonable?  Also, it's probably immaterial to the 5 year plan (but maybe significant to a 20 year plan). 

 

In terms of pay - look at slide 16 (this also applies to the de-leveraging question).  They are generating ~35m in EBITDA with 7m in interest expense.  This leaves 28m a year for cap-ex/growth spending.  Once that growth spending decreases they will have quite a few million in free cash to pay down only ~10m in debt. 

 

I think that the plan is ambitious but not unreasonable.  Can things go wrong that can significantly impair the business?  Of course.

[peter1234]

Thanks for pointing out slide 16. (Numbers are in billions).

 

I guess what makes me a bit skeptical is the lack of detail.

 

From 2013 to 2016 net debt stays flat despite the big capacity expansion and new launches.

 

Then poof, in 2018 net debt is gone.

 

Wonderful it they can execute this.

 

I also miss details on cost savings from combining Fiat & Chrysler (common platforms, purchasing, overhead, new domicile, etc. etc.)

 

:) :) :)

[fareastwarriors]

down big today

[phil_Buffett]

the share Price reaction is ridiculous

[karthikpm]

Fiat is a bet on a turnaround and execution. These are hard to achieve and clearly a bet on a good economy and  Marchionne .

 

Morningstar's view after analyst day is below

 

"While certainly ambitious, we think Fiat's goals are attainable. As for Alfa and Maserati, we hold out Jaguar and Land Rover as an example of highly tarnished but globally recognized premium brand names that, five years ago, were fading quickly. Today, the brands are thriving on a renewed product lineup, expanding into developing markets, and generating EBITDA margins that are the envy of the industry. We have made much more conservative volume and margin assumptions in our DCF model compared with FCA's plan, including one of the highest WACC assumptions in our auto sector coverage. We still arrive at a EUR 14 fair value estimate. Our assumptions include annual average revenue growth of 4% to EUR 104 billion and EBITDA margin expansion of 200 basis points to 11.3% at the end of our five-year forecast ending in 2018."

[fareastwarriors]

 

 

Fiat: on the road to recovery?

 

 

http://www.ft.com/intl/cms/s/3/39fb450a-d5c0-11e3-83b2-00144feabdc0.html?siteedition=intl#axzz30yFbN8s5