FCAU - Fiat Chrysler Automobiles

[Patmo]

The problem with viewing FCAU as a vanilla investment is the fact that it's a massively cyclical business that alternates between generating negative and positive cash-flows. We are in the negative phase until 2017/2018. And over a full business cycle, car OEMs earn unattractive returns on capital.

 

The FCAU trade is close to played out on Ferrari. The remaining catalysts are significantly less visible and harder to 'touch' - the completion of Sergio's 2014-2018 turnaround programme (cessation of capex, hopefully higher operating margins), and/or accretive M&A.

 

So I would safely ignore the EV/EBITDA, EV/EBIT, and all those metrics unless you fully believe that the 2014-2018 turnaround programme will work and magically make FCAU cash-generative and capable of de-levering fast.

 

Not one to 'invest' in, IMO, but possibly one to 'trade'.

 

So you're saying that it's trading at roughly 6x trough EBIT? Isn't that even better?

[Guest Grey512]

By all means, do go ahead and interpret it that way, if you have conviction that the company will stop burning cash come 2017/18 and that the gap between EBIT and FCF will narrow.

[Patmo]

By all means, do go ahead and interpret it that way, if you have conviction that the company will stop burning cash come 2017/18 and that the gap between EBIT and FCF will narrow.

 

You interpreted it for me... Your very first sentence says that this is a massively cyclical business, and that the company is in the worse part of it. How much conviction does one need to believe a business cycle will repeat itself once again? Are you saying that you have a reason to believe there is more to it then?

[kirkomi]

The business is cyclical does not mean that everyone will be successful in riding through it.

[merkhet]

Are people assuming we are at peak SAAR? We are not.

 

Take a look at SAAR for the last decade. There is a triangle shaped hole for SAAR from '09 to '13. A little bit of algebra will show how much "lost SAAR demand" we have to work through. A second triangle from '13 to '15 will tell you how much demand we have gone through.

 

We have a ways to go.

[Guest Dazel]

 

 

We would like to see a buy back announcement....where the FCAU stub is cancelled and the pending Race shares separated and put into a trust and held for a future dividend to FCAU shareholders after the Jan distribution...the Fiat stub bought right now is ridiculously cheap no matter how you look at it...but in a sum of the parts valuation it is crazy cheap.

We know that Sergio is willing to be creative and there is now a lot of room to do deals as in this part of the cycle the autos are doing very very well...we of course like the huge RACE dividend but we think there is a window of opportunity to take advantage of prices...we will see in their earnings announcement next week....looks like a good time to bring down the share count as liquidity is very high.

 

Dazel

[merkhet]

 

 

We would like to see a buy back announcement....where the FCAU stub is cancelled and the pending Race shares separated and put into a trust and held for a future dividend to FCAU shareholders after the Jan distribution...the Fiat stub bought right now is ridiculously cheap no matter how you look at it...but in a sum of the parts valuation it is crazy cheap.

We know that Sergio is willing to be creative and there is now a lot of room to do deals as in this part of the cycle the autos are doing very very well...we of course like the huge RACE dividend but we think there is a window of opportunity to take advantage of prices...we will see in their earnings announcement next week....looks like a good time to bring down the share count as liquidity is very high.

 

Dazel

 

It's not clear Marchionne will have the firepower to do so. He needs money for the transformation. Although, if he can find a way to do it, I'd be thrilled.

[hunterny]

On the topic of vehicle sales and where we are in the cycle, here is some context (I can't attach, but click through to the chart):

 

"We often hear the U.S. peak seasonally adjusted annual rate (SAAR) as being 17-18 million. But from Chart 3 below, we can see that sales relative to population would suggest SAAR levels could go much higher. Additional factors other than the absolute level of sales need to be considered, such as ownership density, miles driven, etc. The point is that the absolute number itself may not be the right way to think about peak sales, as the U.S. has 80 million more people than it did in the 1980s and SAAR was at the 16-17 million level for several years. "

 

--http://www.brandywineglobal.com/aroundthecurve/index.cfm?page=article&content=372495443

[Guest Dazel]

 

 

I will be honest...I think the transformation was plan A and now Sergio is looking at plan B. I would speculate that FCAU will be broken up an sold off piece by piece (Ferrari is start of this process.) The value from these transactions would more than double the market cap after tax...be likely worth much more.

He could certainly could not do that until UAW contract is signed.

 

The sum of the parts valuation in a complete break up is very compelling. If you can sell and spin off Ferrari you are certainly willing to sell anything in your stable. Sergio is retiring in 2018...it would take that long to finish all the deals.

 

He put a 24 month timeline on the auto industry transformation yesterday...and said they would most definitely hope to be involved in it....

 

So if you do not need the money for plan A...you could start buying your stock back and it would make a significant difference with the float vs liquidity that FCAU has...he is playing poker as Monish Pabriah has said in the past. I would break it up and cash in on the Chrysler buy during the crisis if it was me...I bet he will too.

 

Dazel

[rohitc99]

Are RACE options open now ? i am looking at shorting out the RACE piece so that i hold the stub alone. has anyone looked into it ?

[gr33ngi4nt]

I looked into this yesterday (and today). No active option market for RACE that I can see. Only way that I am aware of is to hedge your FCAU position directly, but premiums have picked up as this is what we saw driving the shares down yesterday, or short RACE.

[Guest Dazel]

gr33ngi4nt,

 

just out of curiosity...large premium in what (shorting)? option market seems quite small?

 

The Fcau price is obviously being driven down to a range that the market makers of Race like...have you seen a large short position appear? or are they covering in Europe...volumes their have been massive on FCA with a tiny price range of trading.

 

 

[fareastwarriors]

Fiat Chrysler U.S. Union Workers Easily Ratify 4-Year Contract

 

http://www.bloomberg.com/news/articles/2015-10-22/fiat-chrysler-u-s-union-workers-easily-ratify-4-year-contract

[gr33ngi4nt]

gr33ngi4nt,

 

just out of curiosity...large premium in what (shorting)? option market seems quite small?

 

The Fcau price is obviously being driven down to a range that the market makers of Race like...have you seen a large short position appear? or are they covering in Europe...volumes their have been massive on FCA with a tiny price range of trading.

 

A large broker was telling guys yesterday to short/sell FCAU given the high valuation of RACE and historical outperformance of newco on an event like this. I wouldn't be surprised if everyone was looking at hedging - we saw uptick in premiums yesterday - given what seems like a universal view on the street that RACE is likely trading at an elevated valuation. Disclosure: I own FCAU and haven't done anything with my shares.

[Guest Dazel]

 

Thanks...

interesting concept since FCAU has already taken about $4b out of Ferrari...and the result of the short trade has taken $2b in market cap off of FCAU...as of the IPO pricing date.

It would be interesting if Sergio saw what was happening and decided that he would postpone a ferrari dividend for the time being...and take the cash received and decide to buy back stock...this what yahoo did..they decided to get a tax ruling before doing the dividend...I would like to see FCA do this...they are likely one step ahead.

 

I would be scared to be short...

-The postponement would support Ferrari's market price in a big way...short squeeze

-FCAU shareholders would receive half of the perceived Ferrari dividend in the form of buyback and or cash dividends

-FCAU short squeeze...makes ferrari would be dividend holders happy to wait on the tax ruling.

 

and change strategy to breaking up the company....we know APPLE is in bed with Ferrari and we know that they want in the car business...we know that Google was going to pay big bucks for Tesla...its a cup of coffee for Apple to buy into FCA to get their technology out there. ...as it is for Google.

 

http://www.cnbc.com/2015/10/22/ferraris-sergio-marchionne-talks-tesla-apple.html?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=103092605

[TwoCitiesCapital]

gr33ngi4nt,

 

just out of curiosity...large premium in what (shorting)? option market seems quite small?

 

The Fcau price is obviously being driven down to a range that the market makers of Race like...have you seen a large short position appear? or are they covering in Europe...volumes their have been massive on FCA with a tiny price range of trading.

 

A large broker was telling guys yesterday to short/sell FCAU given the high valuation of RACE and historical outperformance of newco on an event like this. I wouldn't be surprised if everyone was looking at hedging - we saw uptick in premiums yesterday - given what seems like a universal view on the street that RACE is likely trading at an elevated valuation. Disclosure: I own FCAU and haven't done anything with my shares.

 

No doubt it's at a high valuation. I don't know if it can sustain it, or if future earnings will justify it, but I imagine that anyone who sells RACE short and puts the proceeds in FCAU will likely not be disappointed assuming reasonable borrow costs.

 

For every 100 shares of FCAU, you could short 20 shares of Ferrari and buy 75 shares of FCAU. End product is long 175 shares of FCAU ($2,625) and short 20 shares of Ferrari ($1,120). Almost all of your implicit exposure to Ferrari via FCAU is hedged and you've nearly doubled your exposure to FCAU with the proceeds in the process.

 

 

[Guest Dazel]

http://finance.yahoo.com/news/fca-announces-full-exercise-underwriters-211700010.html

 

Now Sergio will get very active with regards to the future of the fiat stub (push GM) but likely has other plans and is  using GM as the stocking horse (not prancing horse!)....numbers out on the 28th...which should be good including RACE we have already seen (disclosure documents) that they are up sharply from last year.

 

1. Ferrari is a huge success in a tough market...Oakmark have them at $6 a share in their value of FCAU...well we received approx $3.5b with the over allotment...even with a drop in price in Race which I don't see happening we have well over $6 a share from Race in our price now...which means the fiat stub is ridiculously cheap no matter how you price a possible Race drop.

 

2. Oakmark thinks (end of july) that the remaining $9 in the Fiat stub can earn $3 a share...at $15.25 today...that stub is trading at a fraction of that $9 price...at $3 earnings it is almost crazily priced. We will have to see earnings for the market to understand how cheap it is with RACE stripped out.

 

I continue to think that Sergio's best move is to buy back shares of the stub here and cut his capex number going forward because the Fiat stub will marry someone to share costs...that may not be GM or another car company....as he has clearly stated that the disrupters cannot be ignored...that means APPLE and Google are in play on partnerships in the future of the automobile build out.

 

3. He sells off the company in pieces and dividends out the proceeds to shareholders as he did with Ferrari as a Chrysler IPO  may be in the cards now that UAW agreement is signed...their numbers are impressive and growing.

 

I like his options...but I like his ability more...in a market where I do not like much...this is value...low interest rates and gas prices are here for awhile and they both favour FCAU.

 

Dazel

[SwimmingNaked]

Who's ready for another blowout quarter?  8)

 

Ferrari spin will deleverage the company even more than I expected. Reduces ~3.5-4 billion in net debt from IPO proceeds and debt transfer (edit: never mind, looks like it will be more like ~2 billion, media reports forgot to account for the fact that Ferrari's cash which is consolidated on FCA's balance sheet will be leaving the company). Then you have the convertible bond that will be exercised next year that will further reduce net debt (though this will be slightly dilutive to existing shareholders). Then you have FCF ramping up as capex peaks out and operational results continue to increase CFO. Net cash position looks more and more likely for the stub by end of next year. You could also get a sale of Magnetti Marelli which would get the company another 3-3.5 billion in cash.

 

It's crazy how fast the company has been making progress. When you read through Sergio's 5 year plan again almost two years later, you can make the argument that the plan as initially laid out was way too conservative. They had US SAAR peaking out at 17 million, very little improvement to no improvement in Europe. Now we see the company already approaching its desired operating margins in NAFTA, net debt position is way better than forecasted (they had estimated they'd still have 10 billion in net debt by end of 2016, but actually they will likely have or approach a net cash position), their 2016 expected revenue was 104 billion, but they will exceed 110 billion this year. Under estimates that I would say are too conservative, the company is at ~3.5x 2016 EV/EBIT (EBIT! not EBITDA). The strategy of focusing on expanding the best brands that generate good margins and high ROIC has been brilliant. Jeep at 1.9 million units sold is worth as much as the entire company today, people talk about Ferrari, but Jeep is the other underutilized jewel in this company that is finally being scaled up to its potential.

 

Let's compile a list of all the things we have to look forward to over the next 1-1.5 years:

 

- Massive deleveraging of balance sheet (deal breaker for many investors who haven't made an effort to understand the company, debt + auto industry = scared investors and lower end industry multiple)

- Ferrari spin

- Ferrari unit growth which will expand margins significantly (Ferrari at 9k units is worth closer to 20 billion than 10 billion, don't listen to Damodaran, his writeup is shockingly bad)

- Continued expansion of operating margins as the company continues to run through the plan (better pricing, better mix, reduced dealer discounts just some of the levers)

- FCF ramping up from capex peaking and CFO increasing

- Chrysler cash ring fencing removed, lowers net interest expense + allows company to run tighter ship

- Potential for European recovery to continue gaining strength (something not considered in original plan)

- Consolidation possibility as FCA becomes a more attractive merger partner (not holding my breath for this even though I think this happens eventually)

 

 

The market is a truly bizarre place. Since the blow out Q2, news for FCA has been nothing but good. Sales have beaten expectations, European auto sales are recovering much quicker than expected (we could be at start of a long cyclical recovery), its biggest competitor in its second largest market (Europe) has been disgraced, Ferrari's IPO went over smoothly, UAW deal has been completed. And yet prior to the IPO news, the stock was down 25% and is still almost 10% below where it was at start of August.

 

I think GM's appetite for a merger will increase because right now they look at FCA's capital structure and think "eww" but the company is deleveraging very quickly. Even then, you can't count on GM to do the rational thing, because senior management there will not want to potentially risk losing positions and power they've spent their entire life working up to, but as FCA begins to look like a more and more attractive partner, shareholder support for a merger should increase.

 

There will be books written about what Sergio has done with Fiat (hopefully). This is one of the greatest value creation clinics in history, in an industry where creating value is enormously difficult no less. Stay patient my friends.

[merkhet]

It's crazy how fast the company has been making progress. When you read through Sergio's 5 year plan again almost two years later, you can make the argument that the plan as initially laid out was way too conservative. They had US SAAR peaking out at 17 million, very little improvement to no improvement in Europe. Now we see the company already approaching its desired operating margins in NAFTA, net debt position is way better than forecasted (they had estimated they'd still have 10 billion in net debt by end of 2016, but actually they will likely have or approach a net cash position), their 2016 expected revenue was 104 billion, but they will exceed 110 billion this year. Under estimates that I would say are too conservative, the company is at ~3.5x 2016 EV/EBIT (EBIT! not EBITDA). The strategy of focusing on expanding the best brands that generate good margins and high ROIC has been brilliant. Jeep at 1.9 million units sold is worth as much as the entire company today, people talk about Ferrari, but Jeep is the other underutilized jewel in this company that is finally being scaled up to its potential.

 

This right here is Sergio's brilliance.

 

I still remember people asking him why he's not fighting for market share in Italy -- as if he had some sentimental duty to maintain market share as an Italian company. His response? "I won't destroy value chasing market share. I just won't do it." & "Why would I destroy value chasing market share when I can instead direct the Italian plants to make Jeeps for export to China?" Not so long ago, people were saying that 1 million units for Jeep was an "ambitious" target...

[tylerdurden]

 

I think GM's appetite for a merger will increase because right now they look at FCA's capital structure and think "eww" but the company is deleveraging very quickly. Even then, you can't count on GM to do the rational thing, because senior management there will not want to potentially risk losing positions and power they've spent their entire life working up to, but as FCA begins to look like a more and more attractive partner, shareholder support for a merger should increase.

 

 

As the GM management said several times main goal for GM is to merge with itself. There are lots of lower hanging fruits for GM to get in terms of cost cuts, GM Financial coming in and plus the upside potential from disruptive technologies, Europe finally going into black, truck portfolio doing great in NA etc. etc. I really don't understand why some people think GM would want a merger with Fiat considering all the integration risks and screwing up potential in any M&A. I am sure Mr. Marchionne will keep trying but as long as GM keeps executing its own plan I don't see this happening in any timeframe...

[schin]

Yes, I'm a big fan of Mr. Marchionne and would love to see GM and Fiat merge.. but, I highly doubt it as Tylerdurden mentioned.

 

But, having Chrysler/Jeep and GM merge, might run into DoJ issues. Although, there's a lot of global competitors - it'll reduce US carmakers to Ford and GM. I think the UAW and Ford would scream bloody murder on reduced bargaining power in the US markets.

 

I think Mary Barra is very competent, but Sergio would be an upgrade.

[vinod1]

Alternatives to GM:

 

http://www.bloomberg.com/news/articles/2015-06-11/marchionne-said-to-mull-alternatives-as-gm-deal-chance-lessens

 

 

 

 

 

Fiat and Mergers: Right Road, Wrong Vehicle

 

Fiat’s Sergio Marchionne is right about the need for auto-industry consolidation. That doesn’t mean potential suitors like GM are lining up for his company

 

http://www.wsj.com/articles/fiat-and-mergers-right-road-wrong-vehicle-1433878401

 

I think we will see some progress in the next few months. There are a number of options:

1. Talking to Bil Ackman and get his hands on GM. Bill is usually a long term shareholder, usually holding for 4-5 years, unlike what the article says as short term oriented.

2. Having a cross-shareholding alliance with Nissan and Renault. That is not as great as full scale merger but it would work.

3. Given the large cash hoard on GM's balance sheet and low interest rate, it would not be a bad idea to make a leveraged buyout offer. Maybe $45 a share. GM's balance sheet has $20 per share so the actual loan is just $25 per share, so that's $40 bn loan in total. Assuming a 10% interest and annual interest payment is 4bn. The current pre-tax annual income for GM is 4, 5 and 6 bn in 2014, 2013 and 2012, and 2015's expected earning would be 8-9 bn pre-tax, excluding any cost synergies, so I think 4 bn annual interest payment is manageable.

 

It does not make sense from a GM perspective. They have lots of low hanging fruit that are likely to generate attractive returns - materials optimization, streamlining operations, standardizing vehicle platforms, taking Cadillac global, etc. A large merger would be much more risky and much less desirable with these opportunities available.

 

I also think they would face regulatory hurdles. Big Three to Big Two? Labor unions would be up in arms as this would reduce their ability to play one against the other. Brand overlap.....

 

GM has cash but they need $20 billion as they pointed out to ride out a brief two year economic downturn. We are not taking great depression here. Just a normal recession.

 

 

Vinod

 

I agree with you guys. Have said the same a while back.

 

Fiat needs a large partner, but GM does not need Fiat at this time or in the next few years.

 

Vinod

[vinod1]

Who's ready for another blowout quarter?  8)

 

Ferrari spin will deleverage the company even more than I expected. Reduces ~3.5-4 billion in net debt from IPO proceeds and debt transfer. Then you have the convertible bond that will be exercised next year that will further reduce net debt (though this will be slightly dilutive to existing shareholders). Then you have FCF ramping up as capex peaks out and operational results continue to increase CFO. Net cash position looks more and more likely for the stub by end of next year. You could also get a sale of Magnetti Marelli which would get the company another 3-3.5 billion in cash.

 

It's crazy how fast the company has been making progress. When you read through Sergio's 5 year plan again almost two years later, you can make the argument that the plan as initially laid out was way too conservative. They had US SAAR peaking out at 17 million, very little improvement to no improvement in Europe. Now we see the company already approaching its desired operating margins in NAFTA, net debt position is way better than forecasted (they had estimated they'd still have 10 billion in net debt by end of 2016, but actually they will likely have or approach a net cash position), their 2016 expected revenue was 104 billion, but they will exceed 110 billion this year. Under estimates that I would say are too conservative, the company is at ~3.5x 2016 EV/EBIT (EBIT! not EBITDA). The strategy of focusing on expanding the best brands that generate good margins and high ROIC has been brilliant. Jeep at 1.9 million units sold is worth as much as the entire company today, people talk about Ferrari, but Jeep is the other underutilized jewel in this company that is finally being scaled up to its potential.

 

Let's compile a list of all the things we have to look forward to over the next 1-1.5 years:

 

- Massive deleveraging of balance sheet (deal breaker for many investors who haven't made an effort to understand the company, debt + auto industry = scared investors and lower end industry multiple)

- Ferrari spin

- Ferrari unit growth which will expand margins significantly (Ferrari at 9k units is worth closer to 20 billion than 10 billion, don't listen to Damodaran, his writeup is shockingly bad)

- Continued expansion of operating margins as the company continues to run through the plan (better pricing, better mix, reduced dealer discounts just some of the levers)

- FCF ramping up from capex peaking and CFO increasing

- Chrysler cash ring fencing removed, lowers net interest expense + allows company to run tighter ship

- Potential for European recovery to continue gaining strength (something not considered in original plan)

- Consolidation possibility as FCA becomes a more attractive merger partner (not holding my breath for this even though I think this happens eventually)

 

 

The market is a truly bizarre place. Since the blow out Q2, news for FCA has been nothing but good. Sales have beaten expectations, European auto sales are recovering much quicker than expected (we could be at start of a long cyclical recovery), its biggest competitor in its second largest market (Europe) has been disgraced, Ferrari's IPO went over smoothly, UAW deal has been completed. And yet prior to the IPO news, the stock was down 25% and is still almost 10% below where it was at start of August.

 

I think GM's appetite for a merger will increase because right now they look at FCA's capital structure and think "eww" but the company is deleveraging very quickly. Even then, you can't count on GM to do the rational thing, because senior management there will not want to potentially risk losing positions and power they've spent their entire life working up to, but as FCA begins to look like a more and more attractive partner, shareholder support for a merger should increase.

 

There will be books written about what Sergio has done with Fiat (hopefully). This is one of the greatest value creation clinics in history, in an industry where creating value is enormously difficult no less. Stay patient my friends.

 

You are much more bullish than I am on Fiat. I sold out in the high $16's as my original thesis played out.

 

As far as revenues are concerned, most of the growth is due to currency fluctuation so I would not count it as exceeding expectations.

 

Vinod

[schin]

I was debating if Sergio should go after VW. It's kinda in a tailspin with it's desiel issue and Sergio would fix it like what he has done in Fiat, Chrysler, etc.... and he get the global platform that he needs.

 

I personally think it's a win-win... and he wouldn't have to keep pestering GM.

[Sunrider]

IIRC shareholder structure would prevent this. State of lower saxony owns a golden share and majority votes controlled by Porsche and Piech families.

I was debating if Sergio should go after VW. It's kinda in a tailspin with it's desiel issue and Sergio would fix it like what he has done in Fiat, Chrysler, etc.... and he get the global platform that he needs.

 

I personally think it's a win-win... and he wouldn't have to keep pestering GM.