FCAU - Fiat Chrysler Automobiles

[Picasso]

cmlber,

 

We're valuing this on EV/EBITDA right?  If EBITDA is flat while the EV goes up the value of your equity goes does in proportion to how much the EV goes up.  If they borrow $5 billion and unless you want to find a new way to value the business, you're going to see a similar drop in the value of the equity (down $5 billion).

 

Thanks for that explanation vinod.  I was sort of shocked when GM said they needed to hold onto at least $20 billion for a rainy day.  Who knows if or when that rainy day comes, but when everyone is valuing the stock ex-cash (and the FCAU valuation to a certain degree hangs on the valuation of other U.S. listed autos) it points to some misunderstanding of the shareholder expectations versus operating needs of the business. 

 

I understand the attraction from the bullish shareholders given the levered nature of the equity and A+ management.  Hopefully you guys make a ton of money and make fun of my posts in a couple years.  Just hopefully you guys aren't sized up like our favorite cloner with that sweet 'stache....

[cmlber]

cmlber,

 

We're valuing this on EV/EBITDA right?  If EBITDA is flat while the EV goes up the value of your equity goes does in proportion to how much the EV goes up.  If they borrow $5 billion and unless you want to find a new way to value the business, you're going to see a similar drop in the value of the equity (down $5 billion).

 

Thanks for that explanation vinod.  I was sort of shocked when GM said they needed to hold onto at least $20 billion for a rainy day.  Who knows if or when that rainy day comes, but when everyone is valuing the stock ex-cash (and the FCAU valuation to a certain degree hangs on the valuation of other U.S. listed autos) it points to some misunderstanding of the shareholder expectations versus operating needs of the business. 

 

I understand the attraction from the bullish shareholders given the levered nature of the equity and A+ management.  Hopefully you guys make a ton of money and make fun of my posts in a couple years.  Just hopefully you guys aren't sized up like our favorite cloner with that sweet 'stache....

 

Picasso,

 

If they borrow $5 billion, they get cash in exchange for taking on the debt...  So EV stays the same.  What I'm suggesting is the right way for an auto company to structure its balance sheet is more like FCAU will have it in 2018 (15-20b in cash 15-20b in debt, 0 net debt).

 

I'm making the distinction between needing $20 billion in cash always for the once in a while rainy day, and needing $20 billion in NET cash always.  I think they are very different when you can borrow at pretty reasonable rates in this environment, particularly if your creditors know you plan to maintain $20 billion in cash on the balance sheet.

[Picasso]

Sorry forgot to include the reason for why they would issue the debt, the need to burn cash.  If they need to use up say $10 billion of cash so they issue $10 billion of debt, the cash balance won't change but the debt will obviously increase by $10 billion.  FCAU isn't investment grade (low-mid B's) so it's hard to know what their future debt costs will look like.  It's low now but it's not usually this low in a downturn.

[cmlber]

Sorry forgot to include the reason for why they would issue the debt, the need to burn cash.  If they need to use up say $10 billion of cash so they issue $10 billion of debt, the cash balance won't change but the debt will obviously increase by $10 billion.  FCAU isn't investment grade (low-mid B's) so it's hard to know what their future debt costs will look like.  It's low now but it's not usually this low in a downturn.

 

There's a big difference between "burning" cash, and needing cash for 6-8 quarters.  It's a working capital drain that comes back quickly.  It's like saying Sees Candy "burns" cash in December.  No, they don't.  It's a very short term working capital related cash outflow that comes back when the selling season is over.  Of course this isn't exactly analogous, but it's closer to Sees Candy in December than it is to "burning" cash.

 

Put another way.  If Berkshire Hathaway's insurance float disappeared 1 out of every 5 years, would you say it's worthless?  Or just less valuable than if it only went up?

[Picasso]

That's true and you can estimate the value of FCAU by normalizing what things *should* look like.  But it just means that the cash everyone backs out in some form of the other is cash you'll never really be entitled to.  It's there but your only metric for performance as an equity holder will be free cash flow for the next x years.

[cmlber]

That's true and you can estimate the value of FCAU by normalizing what things *should* look like.  But it just means that the cash everyone backs out in some form of the other is cash you'll never really be entitled to.  It's there but your only metric for performance as an equity holder will be free cash flow for the next x years.

 

I agree.  I was talking more about GM.  Their cash isn't worthless, just not worth as much as "cash" usually is.

[sampr01]

Sergio made excellent comments on overall auto industry and listen to his comments from auto show etc.  Nobody is making money over a period of time and only Three of them making money. He understand what needs to be done and other CEOs at least don't talk about it. Sergio mentioned in last interview that world is large place and he wants to make money in regions and only US and EU are sync inregards to economical cycle and other two regions have different cycles. This comment is very helpful and comforting.

 

 

[bonkers]

My investment case with FCAU boils down to exceptional management (combined with somewhat supportive environment). Sergio has an amazing track record, I can recognize his rare qualitities, and find his chosen approach both sensible and shrewd. More than that, he has first-hand automotive experience now for 10+ years, and can tap experience in two organizations. He also talks straight, and must deliver his numbers by 2018 to get rewarded - lying all the way there will not help.

 

Even if I read every 10-K footnote and kicked tires on a Detroit fair I would not become much smarter on the future of FCA, and would always remain an amateur compared to them. And so would every analyst out here.

 

I’m sure Sergio could’ve made a less demanding plan if he made the push. But now in December, (before he let go of volume targets in January), he upgraded his leverage target to net cash by 2018 – apparently voluntarily. To me this is all I need to know about their cash flow: they think it’s going to go better than they thought before, and that’s good enough for me.

 

On the question of investment horizon: In the long run we are all dead, and so is every company. Investment in FCAU will not yield exceptional returns forever. But I tend to agree with Sergio that there is certainly hype surrounding autonomous and electric vehicles right now. Tesla has given out their patents because also they acknowledge that transforming global car production is beyond them. Sergio says:“Tesla has nothing that we couldn’t do” – when the time is right and returns on capital are there. With autonomous driving, I believe that the first ones to market can differentiate themselves for a few years, but by the time it enters mainstream the solution can be sourced from one or several suppliers at competitive prices: Google, Apple, Bosch, GM, etc. From the first commercial model, air conditioning took 12 years to gain traction, airbag took 15 years, turbocharger 15 years.

 

With all respect to hedge fund guys, I don’t think anyone knows what kind of recessions we are going to encounter – otherwise there’s a good franchise right there. Even if we could know that, stock market crash of 1987 did nothing to car sales, recession of 2001 did very little. For 1980 and 1990 car sales started declining 2 years before they collapsed. In early 2016 we’re still on the way up, but certainly e.g. suddenly more expensive car loans could dampen the demand.

 

So, caveat emptor. I don’t have to invest in this industry. No manager admits he’s going to fail. A major disaster can always strike tomorrow. FCAU is not risk-free. Hence, enter position sizing: I wouldn't put 50 % of my capital on FCAU, but I believe the odds support placing 10-15 % of my capital at risk.

[bennycx]

I can never make a case here when every comment about Fiat is about Sergio (and for some the strongest argument for a bullish thesis). It actually puts me off more.

 

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

[Guest neiljgsingh]

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

 

Benny, not to trouble you here, but your quote is missing the words "With few exceptions" at its beginning :)

 

On the question of investment horizon: In the long run we are all dead, and so is every company. Investment in FCAU will not yield exceptional returns forever. But I tend to agree with Sergio that there is certainly hype surrounding autonomous and electric vehicles right now. Tesla has given out their patents because also they acknowledge that transforming global car production is beyond them. [...] From the first commercial model, air conditioning took 12 years to gain traction, airbag took 15 years, turbocharger 15 years.

 

Bonkers, your comments are extremely insightful and I think right on the money. The FCAU thesis is not one of a high-margin, moated compounder that is available at a decent price and should be held for the very long-term. Instead, it's a deeper value play, available at a very low valuation and in the midst of massive changes that Mr. Market just can't seem to handle. This is the kind of investment that needs a few solid quarters to make you meaningful returns, and then you exit and move on with your life.

 

I don't think there's been any specific discussion on how long people intend to hold FCAU, but we're not talking about decades here. The end of Sergio's reign in 2018 seems like a decent time to exit assuming the plan isn't entirely derailed by some major corporate event (think more recalls, the need to take on additional leverage, etc.) or some exogenous shock (e.g., recession, cash flows get slammed from peak SAAR).

 

Regarding disintermediation, just ask yourself this: Will Tesla be on better footing in 2018 than it is now? My answer is: "I have absolutely no idea." But it doesn't matter. Even in TSLA's most bullish case, which we all have learned to take with a grain of salt due to their serial delays, the Model III is set to *start* production (meaning very limited release) in 4Q2017. In Elon's own words, "It is way harder to make the machine that makes the machine than it is to make the machine in the first place." Elon's endless quest for perfection in his cars has allowed Tesla to do extraordinarily well in sales and reviews, but you can't say the same of his ability to meet deadlines. That bodes well for traditional car makers.

 

The point here is that FCAU is not going to be rooted out of its competitive environment by TSLA, or by some rumored GOOG or AAPL car, or frankly anyone else before the time necessary for this to be a profitable investment runs out. I'd say their ability to maintain or grow market share from their current peers is much more important over the next few years.

 

In the long-run, your guess as to where the auto industry will be is as good as mine. That question is something we should let traders and speculators figure out. The FCAU thesis has several risks to consider, but the widespread adoption of self-driving/battery powered/fuel cell cars by 2018 are frankly not among them.

 

Don't think about what today's Buffett would say about FCAU; think about what Buffett during the partnership era would have said.

[kranthi_vic]

Fcau has adaptive cruise control and other safety features in its cars already.

 

For fully autonomous tech marchione has already mentioned he will partner with a supplier..

that could be Google/Apple/xyz...Fcau will not invent that, neither will any other non Silicon Valley company.

 

The next issue is electricification, for which we need batteries...again a battery supplier will provide these.

 

There are not enough batteries for all the cars sold in the world. I personally think we will also have fuel cells and a hydrogen infrastructure. Fewer batteries needed.

 

Fcau's plan I guess is to go hybrid then transition to fuel cells later. Unless battery technology improves a great deal. Meanwhile they will produce hybrid  cars capable of 50mpgs.

 

 

 

[goldfinger]

Nothing new but nice summary on Marchionne's recent comments:

http://wardsauto.com/north-american-international-auto-show/marchionne-details-fca-s-future-warns-industry-s-challenges?page=1

[nikhil25]

Q4 Earnings out & 2018 Financial goals raised:

 

http://www.ft.com/intl/cms/s/0/a1bb2512-c500-11e5-808f-8231cd71622e.html#axzz3yTQ84st3

 

During 2015, Fiat Chrysler sold 4.6m vehicles. Earnings before interest and tax increased to €5.3bn including Ferrari, topping analysts’ forecasts of €4.6bn, and up from €3.8bn in 2014.

In Europe, Fiat swung to a profit before tax and interest of €213m in 2015 from a loss of €41m in 2014 — its first year in the black in the region since 2007.

 

Fiat Chrysler now aims to generate annual revenue of €136bn in 2018, versus a previous €132bn target and almost a fifth more than the €113bn it reported for 2015. Adjusted net income should exceed €4.7bn in three years' time, more than double the €2bn recorded last year.

The company also aims to swing to a €5bn net cash position by 2018, from net debt of €5bn at the end of December. The company had previously expected net cash of about €2bn.

[TwoCitiesCapital]

Q4 Earnings out & 2018 Financial goals raised:

 

http://www.ft.com/intl/cms/s/0/a1bb2512-c500-11e5-808f-8231cd71622e.html#axzz3yTQ84st3

 

During 2015, Fiat Chrysler sold 4.6m vehicles. Earnings before interest and tax increased to €5.3bn including Ferrari, topping analysts’ forecasts of €4.6bn, and up from €3.8bn in 2014.

In Europe, Fiat swung to a profit before tax and interest of €213m in 2015 from a loss of €41m in 2014 — its first year in the black in the region since 2007.

 

Fiat Chrysler now aims to generate annual revenue of €136bn in 2018, versus a previous €132bn target and almost a fifth more than the €113bn it reported for 2015. Adjusted net income should exceed €4.7bn in three years' time, more than double the €2bn recorded last year.

The company also aims to swing to a €5bn net cash position by 2018, from net debt of €5bn at the end of December. The company had previously expected net cash of about €2bn.

 

Cheap. Cheap. Cheap.

[fareastwarriors]

Fiat Chrysler Narrows Focus on Truck and SUV Market

 

Auto maker doubles down on belief that America’s love affair with heavier vehicles has staying power

 

 

http://www.wsj.com/articles/fiat-chrysler-narrows-focus-on-truck-and-suv-market-1453928275

[goldfinger]

http://screencast.com/t/Sj8e76LSCv

 

LOL

[investor-man]

It's another round of "Marchionne announces goals and the stock price tumbles". Hurray!

[Sportgamma]

 

I find this absolutely fascinating.

 

Every single time that I read an earnings call transcript and read the subsequent articles in the media, I seriously start to doubt my reading ability. The variant between what I think FCA are saying and what the main media opinionators think FCA are saying is just so wide.

 

If Marchionne wants to imagine what a car company looks like after a few product cycles spent betting everything on the premise that nothing in the car business will change, he need only remember what Chrysler was like when he found it.

 

http://www.bloombergview.com/articles/2016-01-28/fiat-chrysler-s-new-strategy-ignore-the-future?cmpid=yhoo.headline

 

 

[racemize]

I agree.  Same with the stories that Marchionne is betting everything on low oil prices and trucks and UVs.  On the call, he said they've been running their RAM/Jeep plants full out and can't keep up with demand for the last 5 years.  That obviously includes time when oil was more expensive.

[Sportgamma]

I agree.  Same with the stories that Marchionne is betting everything on low oil prices and trucks and UVs.  On the call, he said they've been running their RAM/Jeep plants full out and can't keep up with demand for the last 5 years.  That obviously includes time when oil was more expensive.

 

Totally.

 

I won't take you through all these items that are listed on slide 15, but the introduction of electrification in our world is not avoidable. I think we are going to be seeing applications in a mild hybrid for the first time in 2018 with the introduction of the Ram pickup truck. You will see in addition to hybrid vehicles, which were already launched by Chrysler back in 2008 prior to the bankruptcy, a continuation of the development of both hybrid and plug-in hybrids throughout the plant. I think the objective obviously, is to optimize and leverage the know-how of the group across its regions to ensure that we achieve the least costly compliance scheme that we can.

 

Well, look. In the medium-term, I'll tell you more than half of our fleet in the United States is going to be in some form of hybrid. Calling the right time for the conversion is difficult to tell. If you include 48-volt systems belt start generators as a solution, that's going to occupy the majority of the pickup production in the United States anyway. So we're going to be marrying our hybridization as a way of life relatively quickly.

 

I actually think Marchionne & co have been very blunt on what their gameplan is.

1. They can't produce EVs profitably currently

2. They think that much of what is inside the car is undifferential for the brands

3. They want to share platforms for those non differentiating components

4. They think the market is better at inventing the most of the future "mobility tech"

 

 

[Phaceliacapital]

I agree with you guys, in the past years the media has always used <1% of the transcript to spin a certain story...

 

(Full disclosure: I have (considerable) endowment bias.)

 

I think the average car buyer will not care whether stuff like the "autopilot" is made by Google, Apple, Tesla.. They care about whether it crashes or not, right?

 

 

[yitech]

How about this two statements from business plan update:

 

"Low gas prices now seen as permanent condition"  and  "Market shift from cars to trucks and UVs now seen as permanent shift in demand"

 

Are they making a macro judgement call on future oil prices?

[Sportgamma]

First of all, just as PC, I too am severily affected by endowment effect as well as a boyish admiration for Marchionne.

 

If you look at the two quotes from the Business Plan, they actually aren't exact quotes. The exact quotes are:

 

"Shift in US demand to UVs and trucks expected to be permanent"

 

"Continuation of low gas prices expected - helping to support the shift"

 

I would opine that the differece in these versions are significant.

 

I could easily interpret the statement as saying: our current capacity does not satisfy current demand for pickups and trucks which we are not expecting to collapse. However, low gas prices support the demand, but we think they might stay low.

 

My point is, they are making judgement calls, but investing hundreds of millions on a taxi service also is. Also, the statements are made in context of the business plan so for the next 3 years, not ad infinitum.

 

[ZenaidaMacroura]

Down pretty heavy pre-market.  What's the gloom du jour this time?

[Guest ajc]

 

By the way, I own a decent amount of FCA. Not saying they're right, but if I was arguing for permanently lower gas prices then here's what I'd say:

 

Firstly, the US can now export as much oil as it wants. Anyone who saw what happened with fracking is likely to conclude that the same thing will happen with oil. As a result, if global oil prices ever rose, the US would simply flick a switch and global prices would quickly go lower.

I think it's only the Saudi's and Russians who have very low production costs per barrel right now, but with American technology that will probably also be true shortly for the US and Canada, so OPEC will no longer be able to maximize prices to any degree. All that will happen is that the US will instantly lower them again.

 

Second, it has dawned on the Saudi's that solar is growing exponentially, and that natural gas is being used in trucks because its price is always low, and that hybrid vehicles and electric vehicles (which Elon Musk claims will make up more than half of all global production in 10 to 15 years) only use about 10 or at most 20 percent of the gasoline that a car uses today, so if you put that all together you reach the conclusion that oil will never again have exclusivity as a power source for global transport and that there will be such massive overcapacity once all cars are electric that prices will never recover. This is not the same as has ever happened before, because for the last century oil has had no competitive alternatives.

 

Basically, if you draw the curves out for hybrid and electric car production as a percentage of overall production and as a share of the cars in use globally. Then add whatever natural gas does for the trucking and other industries. Then figure out what that does to global oil consumption.

Then add new US exports and technological advances and work out how much prices drop because now they will reflect the production cost per barrel more than what OPEC wants to earn and have global supply be.

Then factor in what current global supply is and that if the Saudi's ever raised prices again it would simply lead to quicker solar and natural gas adoption, then you can see why Marchionne might argue that prices will never rise again. They might spike here or there, but the US, solar, natural gas and hybrids/EVs would soon take care of that inefficiency.

 

That is what I'd argue if I was going to make the claim that FCA just did. Oil has lost its exclusivity as a power source for vehicles which has been in place since the industry began, and US drillers will ensure the prices stay down, and the Saudi's have already worked out and the Russians will too that the only way for them to maximize the profits that they need to run their countries is to pump as much oil as possible for the next 10 to 20 years while there are still cars that use it. After that, it will only be needed for food production and 1 or 2 other applications, but the vast majority of the oil market will die a death of epic proportions.

 

My guess is that that's the real reason why the Saudi's want to IPO Saudi Aramco. I think they see the writing on the wall between hybrids and EVs (not to mention tougher regulations), US technology and oil exports, the first ever competitive alternatives with solar and natural gas, and the need to monetize as much of the perceived value of the business right now before it evaporates and there's a civil uprising caused by a revenue shortfall. This has nothing to do with capital participation and everything to do with getting out of the oil business while the going's still reasonably good.

 

Anyway, that's what I'd argue if I'd made that claim.

Marchionne clearly values game theory and probabilities and knowing what impacts his business, and my guess is that he got his team around a table because oil prices are so important to FCA's future and they tackled the problem the same way they would any issue of business economics and that's what they came up with.

 

 

(TL, DR): Oil stays low, because everytime it goes up, EVs, hybrids, solar, natural gas, and the US take a bigger share of the pie and the Saudi's and Russians miss a chance to monetize whatever they have left in the ground. In 20 years or so, hybrids, EVs, natural gas and solar ensure that the global oil industry never again earns any worthwhile revenues. After that, it never comes back and is mainly used for food production. Powering a car meanwhile becomes very cheap because EVs cost very little to recharge. This is what happened to the global coal industry over the last century speeded up by 4 or 5x. FCA might argue they're not making a macro prediction, so much as they're simply stating the obvious based on what they already see happening in the industries that compete with or rely on oil and just drawing those curves out using a bunch of conservative estimates.