FCAU - Fiat Chrysler Automobiles

[Picasso]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

[fareastwarriors]

Minivan Makeover Seeks to Appeal to New Customers

 

Draw of roomy interiors and sliding side doors keep annual sales around 500,000

 

 

http://www.wsj.com/articles/minivan-makeover-seeks-to-appeal-to-new-customers-1453113004

[ERICOPOLY]

Heads I win, Tail I.....

 

 

There is an explicit display of arrogance in that catch-phrase.  It's pretty much the last thing I want my investor to be telling me. 

 

It's a more discreet form of...

"Ah, don't worry... we can only make a ton of money!  Can't lose!"

 

 

 

 

 

[merkhet]

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

This might be the wrong thread for this, so if it gets bigger, we might want to take it elsewhere, but what makes you think that we're going into a recession?

[goldfinger]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

[RadMan24]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

 

You forgot the check about the industry maintaining current or near current levels for several years. Or is the new cycle everyone talks about goes from 18 million right back down to 9 million?

[vinod1]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

 

My comments are around position sizing. The upside potential is clear if things work out as management intends.

 

Right now where does Fiat make money? It is really only in trucks and SUV's in U.S. Almost everything else is barely profitable.

 

Marchionne's plan, I do not think assumes a recession global, local or otherwise. The plan makes a lot of ambitious gains for Jeep, Alfa Romeo, and Maserati. These are really the profit drivers.

 

I think highly of Marchionne and he is by far the best auto CEO. But those are not conservative target's. It is good that he is shooting for them for his management team. Just do not see how conservative investors can just assume that they would be achieved.

 

Given the level of debt and other risks, I can think of ways to lose money. Maybe I have too vivid an imagination.

 

I held Fiat in the past but sold it in the $16s as it reached closer to the bottom estimate of IV. At this price it closer to being attractive again, but it would not be a big position due to downside risks.

 

Vinod

[Picasso]

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

This might be the wrong thread for this, so if it gets bigger, we might want to take it elsewhere, but what makes you think that we're going into a recession?

 

We've never seen these spreads on high yield bonds without going into recession before.  Manufacturing has already gone into contraction in the U.S., the only thing holding up is services but you've never seen those two diverge for very long.  Almost every aspect of the capital markets have been saying we're going into a recession (CMBS, now investment grade spreads widening out, also breaking out in Europe and pretty much everywhere), 10-2 spread is the lowest it's been since the recovery started and that is with the fed starting to raise rates, if the fed raises even 100 basis points they probably invert the yield curve which tells you how close we are to the edge here.  Anyway could go on but those are not great conditions to be long a cyclical name that won't be generating free cash flow for a while.  Who knows if we get a bad recession or not, or even how it would affect FCAU since a recession doesn't always mean terrible things for cyclical stocks, but when you have this many indicators staring you in the face you have a really high probability of seeing some type of contraction.  Regardless we're probably looking at peak numbers across a lot of different industries in 2015/2016.

[vinod1]

Fiat is like an equity stub due the huge financial leverage on top of operational leverage. Change your assumptions a bit and your estimate of value can quadruple. So it is quite easy to make the case for why it is undervalued at nearly any price.

 

Add to the fact the misleadingly large cash position, and you can just make it look as cheap as you want it to be.

 

Vinod

[oddballstocks]

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

This might be the wrong thread for this, so if it gets bigger, we might want to take it elsewhere, but what makes you think that we're going into a recession?

 

We've never seen these spreads on high yield bonds without going into recession before.  Manufacturing has already gone into contraction in the U.S., the only thing holding up is services but you've never seen those two diverge for very long.  Almost every aspect of the capital markets have been saying we're going into a recession (CMBS, now investment grade spreads widening out, also breaking out in Europe and pretty much everywhere), 10-2 spread is the lowest it's been since the recovery started and that is with the fed starting to raise rates, if the fed raises even 100 basis points they probably invert the yield curve which tells you how close we are to the edge here.  Anyway could go on but those are not great conditions to be long a cyclical name that won't be generating free cash flow for a while.  Who knows if we get a bad recession or not, or even how it would affect FCAU since a recession doesn't always mean terrible things for cyclical stocks, but when you have this many indicators staring you in the face you have a really high probability of seeing some type of contraction.  Regardless we're probably looking at peak numbers across a lot of different industries in 2015/2016.

 

Railcar loadings are another data point.  They've never gone negative when the economy wasn't in a recession or heading into one.

[goldfinger]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

 

You forgot the check about the industry maintaining current or near current levels for several years. Or is the new cycle everyone talks about goes from 18 million right back down to 9 million?

No I am not assuming a return to the great recession. Plus there are tailwinds given oil prices/pent up demand created by 9/10M vehicule sales missing because of the great recession (these are not all spent as showed by the car fleet age in NA).

[goldfinger]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

 

My comments are around position sizing. The upside potential is clear if things work out as management intends.

 

Right now where does Fiat make money? It is really only in trucks and SUV's in U.S. Almost everything else is barely profitable.

 

Marchionne's plan, I do not think assumes a recession global, local or otherwise. The plan makes a lot of ambitious gains for Jeep, Alfa Romeo, and Maserati. These are really the profit drivers.

 

I think highly of Marchionne and he is by far the best auto CEO. But those are not conservative target's. It is good that he is shooting for them for his management team. Just do not see how conservative investors can just assume that they would be achieved.

 

Given the level of debt and other risks, I can think of ways to lose money. Maybe I have too vivid an imagination.

 

I held Fiat in the past but sold it in the $16s as it reached closer to the bottom estimate of IV. At this price it closer to being attractive again, but it would not be a big position due to downside risks.

 

Vinod

Europe is doing better and no one talks about it. That's big for Fiat itself. And Jeep is thriving there (doubled in one year in many large EU countries).

SUV/Truck/Large cars trends may have become permanent and Marchionne seems to adapt his plan going forward. Jeep will help greatly. This is a brand with developing competitive advantages. He is not promising 7M vehicules/year anymore. He will downscale Maserati/Alpha Romeo ramping efforts.

Marchionne allocates capital rationally and acts differently than other car CEOs. Not to say that a recession would not damaged Fiat/Chrysler but his ability to maneuver is uncommon (his track record).

Analysts who have been bearish all the way are projecting 5M and 3.5B$ profits by 2018 - is a 9.5$B market cap overpriced.

I am not trying to contradict the fact that this is a tough business and that there are plenty of risks, just that there are plenty of other ways to look at it in this precise case...

 

[goldfinger]

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

This might be the wrong thread for this, so if it gets bigger, we might want to take it elsewhere, but what makes you think that we're going into a recession?

 

We've never seen these spreads on high yield bonds without going into recession before.  Manufacturing has already gone into contraction in the U.S., the only thing holding up is services but you've never seen those two diverge for very long.  Almost every aspect of the capital markets have been saying we're going into a recession (CMBS, now investment grade spreads widening out, also breaking out in Europe and pretty much everywhere), 10-2 spread is the lowest it's been since the recovery started and that is with the fed starting to raise rates, if the fed raises even 100 basis points they probably invert the yield curve which tells you how close we are to the edge here.  Anyway could go on but those are not great conditions to be long a cyclical name that won't be generating free cash flow for a while.  Who knows if we get a bad recession or not, or even how it would affect FCAU since a recession doesn't always mean terrible things for cyclical stocks, but when you have this many indicators staring you in the face you have a really high probability of seeing some type of contraction.  Regardless we're probably looking at peak numbers across a lot of different industries in 2015/2016.

 

Railcar loadings are another data point.  They've never gone negative when the economy wasn't in a recession or heading into one.

 

Last time I checked, O&G industry had a lot to do with that slowdown in rail traffic...

[RadMan24]

I will not argue that Auto sales appear to be at the peak, but I would also argue they could remain at these levels for some time, even if there is a recession, a pullback would not always be the end of the world. Europe is also rebounding, but that is one of those, see it to believe it.

[merkhet]

Maybe we should take the recession forecasting to a different thread. Do we have one already set up for such a discussion?

 

Add to the fact the misleadingly large cash position, and you can just make it look as cheap as you want it to be.

 

Why is the cash position misleading?

[goldfinger]

Capital intensive: check

Highly cyclical: check

Heavy financial leverage: check

No competitive advantage: check

Labor force unionized: check

Industry subject to heavy regulatory oversight: check

Company in midst of turnaround: check

Has the industry benefited from macro tailwinds in last few years (low oil prices, cheap auto loans, etc): check

 

I cannot believe I found a company that passed all my checklist criteria. I am going to put 50% of my money in this and cannot see how I can lose money.

 

Heads I win, Tail I.....

 

Vinod

 

+1. Pabrai is going into what looks like another recession with a massive bet on a few cyclical names. His risk management process is absolutely retarded.  Even if it works out he is taking on a ton of risk in the process and it shows when the tide goes out. You would think losing over 70% in the last bear market would have made him a bit more respectful of risk management.

 

A global recession, recession in USA, somewhere else?

As a parenthesis Marchionne's plan assumes little improvement in SA, mediocre/no growth in NA, same in EU and a ramp up in china for chrysler.

What I see right now is a company priced like VW which is absolutely hated right now.

By the way VW stock multiplied by 7 or 8 last decade (interrupted by the great recession for some time).

 

Please can you open a new thread to discuss Pabrai (I won't join you), FCAU is not Pabrai's pick only... really not at all.

I just would really like to be able to discuss FCAU here in details with precise arguments and not too much passion about someone else or generalities?

 

My comments are around position sizing. The upside potential is clear if things work out as management intends.

 

Right now where does Fiat make money? It is really only in trucks and SUV's in U.S. Almost everything else is barely profitable.

 

Marchionne's plan, I do not think assumes a recession global, local or otherwise. The plan makes a lot of ambitious gains for Jeep, Alfa Romeo, and Maserati. These are really the profit drivers.

 

I think highly of Marchionne and he is by far the best auto CEO. But those are not conservative target's. It is good that he is shooting for them for his management team. Just do not see how conservative investors can just assume that they would be achieved.

 

Given the level of debt and other risks, I can think of ways to lose money. Maybe I have too vivid an imagination.

 

I held Fiat in the past but sold it in the $16s as it reached closer to the bottom estimate of IV. At this price it closer to being attractive again, but it would not be a big position due to downside risks.

 

Vinod

Europe is doing better and no one talks about it. That's big for Fiat itself. And Jeep is thriving there (doubled in one year in many large EU countries).

SUV/Truck/Large cars trends may have become permanent and Marchionne seems to adapt his plan going forward. Jeep will help greatly. This is a brand with developing competitive advantages. He is not promising 7M vehicules/year anymore. He will downscale Maserati/Alpha Romeo ramping efforts.

Marchionne allocates capital rationally and acts differently than other car CEOs. Not to say that a recession would not damaged Fiat/Chrysler but his ability to maneuver is uncommon (his track record).

Analysts who have been bearish all the way are projecting 5M and 3.5B$ profits by 2018 - is a 9.5$B market cap overpriced.

I am not trying to contradict the fact that this is a tough business and that there are plenty of risks, just that there are plenty of other ways to look at it in this precise case...

 

As a side comment, I would not feel confi in GM because I still think that their corporate mentality sucks and this is a long term issue for a car company... I know that Buffett is in it but not for me...

In the case of FCAU you are dealing with value investors/rational capital allocators/owners at the helm (Elkann+Marchionne) and who are executing on a plan following years of execution and preparation with exceptional abilities to tweak and react... makes me feel better especially when valuations discount almost total failure!

[Picasso]

Forecasts aside, because I don't believe in them either, I'd just like to know if there has ever been a time where we have these credit conditions and it paid to buy a levered cyclical like FCAU. From what I've experienced or studied it never ever paid off and in fact became very painful. Credit is the life blood of these cyclical businesses.

 

Downturns are also very tricky when trying to model future earnings. It's different to say how much they earned during a tough spot and say how much they can earn if things stay the same or get a bit better.  Going from strength to weakness is a totally different story. You will expect something to be a constant when suddenly it becomes much more variable and difficult to pin down. Something that is a money maker today will suddenly start losing money in the downturn.

 

Anyway not really trying to bash the idea but trying to find out why "this time is different" for FCAU. So far the arguments seem to hinge on valuation tied to future improvement.

[jay21]

Maybe we should take the recession forecasting to a different thread. Do we have one already set up for such a discussion?

 

Add to the fact the misleadingly large cash position, and you can just make it look as cheap as you want it to be.

 

Why is the cash position misleading?

 

Vinod might have meant something different but I find it concerning that GM says they think they need $20b to run. They are probably overly cautious but if you need to run a business using that much net cash...jesus. It makes FCAU look terrible with net debt imo.

[cmlber]

Forecasts aside, because I don't believe in them either, I'd just like to know if there has ever been a time where we have these credit conditions and it paid to buy a levered cyclical like FCAU. From what I've experienced or studied it never ever paid off and in fact became very painful. Credit is the life blood of these cyclical businesses.

 

Downturns are also very tricky when trying to model future earnings. It's different to say how much they earned during a tough spot and say how much they can earn if things stay the same or get a bit better.  Going from strength to weakness is a totally different story. You will expect something to be a constant when suddenly it becomes much more variable and difficult to pin down. Something that is a money maker today will suddenly start losing money in the downturn.

 

Anyway not really trying to bash the idea but trying to find out why "this time is different" for FCAU. So far the arguments seem to hinge on valuation tied to future improvement.

 

Jeep will sell ~1.2m vehicles in 2015.  @ $25k average prices and 7% EBIT margins, you get $2.1 billion in EBIT. 

 

Ram will sell ~500k vehicles in 2015.  @ $25k average prices and 10% EBIT margins, you get $1.25 billion in EBIT.

 

So you get ~$3.4 billion EBIT TTM from Jeep & Ram.  They are basically all of the groups EBIT.  What would GM, Ford, Toyota, VW, Honda, Nissan, Hyundai pay for either of those brands debt/pension free? 

 

I think you can easily make the case that Jeep & Ram are worth more than the entire enterprise value today based on TTM #'s, not giving any credit for growth.

[jay21]

Someone made a good point to me. Can you separate Jeep and Ram from the rest of the biz? If not, is the rest of the biz worth negative dollars?

[SwimmingNaked]

Fiat pre-split was by far my biggest investment as well and it was so because of the unique attributes of the investment. The idea that FCA is in a not so great industry and has operating + financial leverage is not a revelation, most FCA investors know this (or should know this). The thing that made FCA an attractive investment is the fact that we got a very cheap way to explore what the stub is worth, and this was because of Ferrari. When I look ahead I can get my initial avg cost (~10-11 euros) through appreciation in value of Ferrari alone. Ferrari is the insurance here and it's going through a unique period in its history where it will significantly grow profitability, and it doesn't have the bad attributes of the major OEM business. FCA is the option that can potentially be worth a lot, and right now it is looking like Marchionne is more likely to hit on his plan (or at the very least, come close to hitting on it) than not. There is more risk on this side of the story, which is why I'm keeping my Ferrari shares to at least get me close to (or even more than) my initial investment in FCA, as it is a much more predictable and resilient biz during bad times.

 

I'm not a Pabrai follower (my sympathies to those who followed him into zinc), but the "heads I win, tails I don't lose much if anything" was an appropriate way to characterize this investment. He got in at an even lower price point than me (IDK what his avg price was, I don't follow his investments closely enough), so from his perspective the risk reward was even more asymmetrical. When you look at how the investment was structured (Ferrari as insurance on your initial investment) the position size can actually be justified, because you are getting a biz that's going to be worth as much as your initial investment and that biz doesn't have the unsavoury qualities of the not so great biz. If you want to criticize the guy, go make a thread about him, the attractiveness of this investment is independent of his presence. And at <10 euros the position sizing made a LOT of sense.

 

fyi, most bearish research reports and posts in this thread are so clueless/bad/superficial. I have yet to see a bear point out something I and other FCA longs have not already considered. Do you think we don't know that the auto OEM biz is capital intensive, that FCA is more levered than others, and that the industry (like most industries btw) is cyclical? This is not news, it's so obvious that it's not even worth pointing out. And most longs understand the leverage, the different components of the business and what they are worth, the cyclical considerations a lot better than you do. You have some people in here who are patting themselves on the back two weeks after the spinoff because the price has fallen (like everything in this market) despite there being no revision in earnings and nothing about the actual business/story changing much. It will be interesting to see if you guys will be around in a few quarters.

[goldfinger]

Fiat pre-split was by far my biggest investment as well and it was so because of the unique attributes of the investment. The idea that FCA is in a not so great industry and has operating + financial leverage is not a revelation, most FCA investors know this (or should know this). The thing that made FCA an attractive investment is the fact that we got a very cheap way to explore what the stub is worth, and this was because of Ferrari. When I look ahead I can get my initial avg cost (~10-11 euros) through appreciation in value of Ferrari alone. Ferrari is the insurance here and it's going through a unique period in its history where it will significantly grow profitability, and it doesn't have the bad attributes of the major OEM business. FCA is the option that can potentially be worth a lot, and right now it is looking like Marchionne is more likely to hit on his plan (or at the very least, come close to hitting on it) than not. There is more risk on this side of the story, which is why I'm keeping my Ferrari shares to at least get me close to (or even more than) my initial investment in FCA, as it is a much more predictable and resilient biz during bad times.

 

I'm not a Pabrai follower (my sympathies to those who followed him into zinc), but the "heads I win, tails I don't lose much if anything" was an appropriate way to characterize this investment. He got in at an even lower price point than me (IDK what his avg price was, I don't follow his investments closely enough), so from his perspective the risk reward was even more asymmetrical. When you look at how the investment was structured (Ferrari as insurance on your initial investment) the position size can actually be justified, because you are getting a biz that's going to be worth as much as your initial investment and that biz doesn't have the unsavoury qualities of the not so great biz. If you want to criticize the guy, go make a thread about him, the attractiveness of this investment is independent of his presence. And at <10 euros the position sizing made a LOT of sense.

 

fyi, most bearish research reports and posts in this thread are so clueless/bad/superficial. I have yet to see a bear point out something I and other FCA longs have not already considered. Do you think we don't know that the auto OEM biz is capital intensive, that FCA is more levered than others, and that the industry (like most industries btw) is cyclical? This is not news, it's so obvious that it's not even worth pointing out. And most longs understand the leverage, the different components of the business and what they are worth, the cyclical considerations a lot better than you do. You have some people in here who are patting themselves on the back two weeks after the spinoff because the price has fallen (like everything in this market) despite there being no revision in earnings and nothing about the actual business/story changing much. It will be interesting to see if you guys will be around in a few quarters.

 

Absolutely I am not selling a single share of Ferrari. I think this is a case of exceptional business where keeping it in your portfolio protects you against your own mistakes in the long run...

Marchionne's decision and timing in spinning off Ferrari was absolutely rational: it separates 2 businesses of very difference characteristics when they are both able to stand on their own while helping with the deleveraging process of the mother ship. Ferrari's margins can be boosted and EBIT more than doubled in a few years without major R&D and CAPEX. Going forward, now that we have details on the financials, we can see that is is also quite recession resistant and has some control on pricing/volume. Some may not like the IPO price but I have literally seen people justify their dislike of the IPO price by stating that Ferrari is not a luxury brand (it was not on this board): it is THE luxury brand (at least qualitatively)!!! Overall I have only heard negative things about Fiat/Chrysler, Ferrari, Marchionne and his plan from almost anyone in the last 3 years (press, analysts and investors included).

Net debt has decreased to around 6B EUR and 2015 is ahead of plan - we will discover the numbers end of this month. Ring fencing goes away 1H2016. Net debt will probably be close to negligible by the end of this year barring big failures...

Would I have invested along with a super talented investment manager taking over some crappy textile mills (agreed with lot less net leverage) who was not a textile guy some decades ago? I sure hope so (agreed this is not the same case but just saying about generalities...)

[vinod1]

Maybe we should take the recession forecasting to a different thread. Do we have one already set up for such a discussion?

 

Add to the fact the misleadingly large cash position, and you can just make it look as cheap as you want it to be.

 

Why is the cash position misleading?

 

Vinod might have meant something different but I find it concerning that GM says they think they need $20b to run. They are probably overly cautious but if you need to run a business using that much net cash...jesus. It makes FCAU look terrible with net debt imo.

 

You probably know this already.

 

Auto companies have a positive cash flow during good years, as the dealers pay upfront when they take delivery but auto companies pay quite a bit late for their suppliers. This looks pretty good during an up cycle. When sales stagnate a bit or go down this cycle reverses and companies burn cash - they can easily burn cash equal to 5% to 7% of sales.

 

If you take a look over the last 30 years at the Accounts Payables and Account Receivables difference and relate it to how much cash the auto companies hold, you can understand the rationale.

 

It addition they need 2% to 3% of sales in cash just as part of doing day to day business. Add in cash for year ahead debt maturities, that would be another 3% to 4% or so of sales.

 

So a typical auto company would need 10% to 12% of sales in cash at a minimum. For Fiat, just to ride out a 1 year downturn, they need roughly around euro 15 billion in cash. You would want to hold a little bit more for a longer duration downturn.

 

This cash is just as vital to working of Fiat as any of its factories. So subtracting this cash in enterprise value calculations as if it is free cash that can be used for other purposes is misleading. The focus on net debt is also in the same vein.

 

I first came across this in one of the auto bailout books and I think it is "Overhaul" but not sure. It has a little commentary around this. I then took a look at the data from 1984 and it made sense.

 

Vinod

 

 

[merkhet]

Gotcha. Thanks for the explanation.

 

I thought you were saying there was some funny business happening or something.

[cmlber]

Maybe we should take the recession forecasting to a different thread. Do we have one already set up for such a discussion?

 

Add to the fact the misleadingly large cash position, and you can just make it look as cheap as you want it to be.

 

Why is the cash position misleading?

 

Vinod might have meant something different but I find it concerning that GM says they think they need $20b to run. They are probably overly cautious but if you need to run a business using that much net cash...jesus. It makes FCAU look terrible with net debt imo.

 

You probably know this already.

 

Auto companies have a positive cash flow during good years, as the dealers pay upfront when they take delivery but auto companies pay quite a bit late for their suppliers. This looks pretty good during an up cycle. When sales stagnate a bit or go down this cycle reverses and companies burn cash - they can easily burn cash equal to 5% to 7% of sales.

 

If you take a look over the last 30 years at the Accounts Payables and Account Receivables difference and relate it to how much cash the auto companies hold, you can understand the rationale.

 

It addition they need 2% to 3% of sales in cash just as part of doing day to day business. Add in cash for year ahead debt maturities, that would be another 3% to 4% or so of sales.

 

So a typical auto company would need 10% to 12% of sales in cash at a minimum. For Fiat, just to ride out a 1 year downturn, they need roughly around euro 15 billion in cash. You would want to hold a little bit more for a longer duration downturn.

 

This cash is just as vital to working of Fiat as any of its factories. So subtracting this cash in enterprise value calculations as if it is free cash that can be used for other purposes is misleading. The focus on net debt is also in the same vein.

 

I first came across this in one of the auto bailout books and I think it is "Overhaul" but not sure. It has a little commentary around this. I then took a look at the data from 1984 and it made sense.

 

Vinod

 

At the same time, the cash isn't worthless.  It's very easy to borrow against a pile of cash, so that the company could easily operate with 0 net debt and enough cash.  You should penalize the earnings by interest required to maintain a reasonable cash buffer with 0 net debt.