Unit Cost: $13
Clone: Mohnish
This write up is based on Mohnish Pabrai’s past valuation model of FCAU. My view is unoriginal, the credit goes out to him.
To invest in this company you must have complete trust in management and their ability to execute on their guidance. For proof of their competence look at their 2013-2018 guidance and you will find that they delivered in spades. They achieved their goals by discontinuing their low margin vehicles and focusing on high margin vehicles such as Jeep?RAM. They unleashed shareholder value by spinning off Ferrari and selling their auto parts business Magneti Marelli.
+Operation Qualities
Management: Compensation is based on Cash/Debt ratio. Company currently has a +net positive cash position.
Qualities: Jeep is the only vehicle of its kind. Ram has approx. 16-18% margins and 28% market share. Difficult for foreign truck players to enter market due to 25% chicken tax. Chrystler Pacifica is high margin. Majority of income comes from Jeep/RAM. Also own Maserati and Alpha Romeo.
Pent up demand: EMEA, LATAM, APAC
Global: Trending to Utility Vehicles
New products and market entrance: Grand Wagoneer, Wagoneer, Gladiator, New RAM generation.
Efficiency: Increasing 2018-2022 margins through $11B in cost savings via manufacturing and purchasing efficiencies.
After researching their history and gaining trust in managements ability to execute on their guidance, all the information that you need is in the link. The information I have gleaned from the link is below, under valuations.
https://www.fcagroup.com/capitalmarketsday/Presentations/FCA%20June%201%202018%20CMD_BP%20Financial%20Overview.pdf
Valuation:
2018-2023 guidance
Current price/share: $13
Current Market Cap: $21B
2023e Cash: $22B via cashflow/possible sales of companies
2023e Eps: $7-8
Cash and eps estimates is after paying out a 20% ratio dividend
2023e Cash including dividends: $27.5B
A 2023 multiple of 4 is $28-32/share….plus your money back in cash. If they deliver on half of their estimates then the deal goes from great to mediocre.
Plans for cash: Buybacks, FinCo, minimum cash balance. Imagine the buyback opportunity if the shares stay at their current price or decrease. Heads I win, tails I don’t win as much.
They have a contingency plan to conserve margins in case of a 30% North American market decline to enable them to break even at 12M unit sales in the region.
Bear:
1. Ride Sharing: I don’t think there is a strong argument for this. Vehicles being used 90% of the time vs 5% doesn’t decrease the amount of mileage being used as a country. It just mean there will be a higher turnover rate.
2. Oil: US reserves > Saudi Arabia and Russia
3. Recession: Autos are hit hardest during downturn, a strong balance sheet and contingency plan makes FCAU resilient during a recession. The price may go down, but business value shouldn’t.
4. Peak auto sales: Housing starts are well below normal, Fiat is global, the other parts of the world’s auto cycles don’t run in sync with North America.
5. UAW: Union negotiations have begun. (Union negotiations are completed)
Q2 ’19
Per Pabrai Funds quarterly letter:
1. Currently selling and will continue to sell as he finds cheaper deals
2. Has a number of headwinds
3. Still considerable upside
4. “It is all about opportunity cost.”
-2019 Guidance remains intact. Revenue is being boosted by new RAM pickup sales. Jeep Gladiator is exceeding expectations.
-Higher than usual Cap Ex and one time Q2 payments of $0.4B
-Second half will focus on under-performing areas(Maserati, EMEA(margins)).
-Getting into electric cars, entered partnership agreements with Enel X and Engie.
Q3 ’19
FCAU and PSA Group(Pugeot) agreed on a merger where shareholders of each company would acquire 50% of the combined operation. FCAU shareholders will receive a special dividend of $6.1B(20% of market cap) and spin off comau, it’s automation unit. I bought and sold at $13.27 and $15.80 for a 20% gain and a 75% xirr. And then I realized what a good arbitrage situation this is and bought in at $16(not my greatest moment to sell in the first place). It can go down 20% from my price of $16 and I will still get my money back from the dividend. Not bad, question is how soon can I get it? I don’t know, but it seems like a safe place to keep my cash in the meantime.
The Rational Cloner 