Fiat Chrysler — From Rags to Riches [Sold]

Posted on by Saamia Khan

By David Shakirov

UPDATE 11/4/2019: As of 11/4/2019, the author recommends to sell FCAU.

Even after a capital gain of 17%, from $13.78 (5/28/19 closing price) to $16.14, today, the stock continues to trade at a compressed EBITDA multiple. Unlike its competitors, FCAU runs net cash, and will likely see margin expansion as it offers higher end vehicles like the Alfa Romeo CUV, electric Maserati, and a new three row luxury Jeep. This quarter, FCAU was able to increase adj. EBIT, even as revenues and volumes shrunk (which is even more impressive with a ~15% gross margin business).

However, two issues make the investment questionable. First, holding an auto maker late cycle can prove to be dangerous. Second, the merger between FCAU and Peugeot is a source of significant uncertainty. It becomes increasingly difficult to evaluate the synergies between the two auto makers, and the benefits of such a transaction. A sell will book a 17% gain for our readers (or 7% above the S&P 500).

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In the late 2000’s the American car market was in shambles. Companies including Chrysler and General Motors were pushed into bankruptcy and provided a lifeline by the federal government. Coming out of bankruptcy in 2009, Chrysler was a financially distressed corporation trying to manufacture $20,000 vehicles during the worst financial crisis since the Great Depression — what I call a hard sell. In the meanwhile, Fiat, a small Italian car marker saw an opportunity. Sergio Marchionne, the CEO of Fiat at the time (and known to be a espresso-holic and chain smoker), began expanding his stake — 20% in 2009, to 53% in 2011, and a 100% acquisition in 2014. The result  — Fiat Chrysler Automobiles N.V. (FCA).

Following the merger, FCA’s vehicle portfolio turned to be incredibly diverse and highly valuable. It included brands like Ferrari, Maserati, and Alfa Romeo (the Italian three musketeers), Chrysler (built Detroit-tough), Jeep (the legendary off-roader), and Dodge (true American muscle). FCA continues to make vehicles from minivans to Italian sports cars. Since then, its brands have seen immense growth (Maserati volumes increased 8x, its Ram trucks saw 8 years of consecutive growth, Alfa Romeo sales up by 2.6x, Jeep sales doubled, etc). Only 10 years ago, the company was in financial ruin and faced near-death.

Its 2022 master plan was unveiled last summer (one month before its CEO, Sergio, passed away) at a sentimental event celebrating the FCA success story. Its goals (and my subsequent take) include :

  • $10B investment in electric tech

    • FCA recently spent over $2B to buy emissions “credits” from Tesla to meet strict carbon-laws FOR 2020 — electrification tech is important to keep emissions low

  • Partnership with Google’s Waymo and BMW’s Aptiv for autonomous driving

    • Unlike other companies, this partnership is less capital intensive. With Waymo, FCA will provide ~60,000 Chrysler minivans for testing, while it shares resources, data, and testing with BMW

  • Maserati volumes double to 100,000 (double from 2018) and margins increase to 15% (13.8% in 2018)

    • Maserati is moving to compete with the German’s high end offerings, while its current demographic is both 5-10 years younger and has a 2x average income (there is both potential to tap into the high-mid income bracket, plus offer higher end options, all to longer-lasting customers than the competition)

  • Ram is increasing its high end truck offerings to increase its ASP

    • The brand is seeking double digit YoY volume growth and lags by $5-10k behind competitors in ASP ($50,000 vs. $56,000 for Ford, for example). Given strong loyalty data, new high end offerings should increase revenues significantly. There is also untapped potential in the Asian markets with the Ram brand

  • Expansion of Jeep as a mainstream SUV brand, with a focus on electrification

    • Historically, Jeep had an image of a tough, military off roader. Now, it sells 1 in every 17 SUVs, while it expanded production capacity by 2.4x over the last four years. With SUVs constituting most car purchases in the US, it’s natural to expand into this market. By 2022, Jeep sees industry-wide utility sales (UVs) move from 32M to 37M, and has a long term goal of 20% UV market share. It will also introduce 4 dedicated electric UV models.

  • 1.75x EBIT growth, margin increase from 6.8% to 10%, cash increase from $12B to $20B

    • Growth prospects both geographically and within each FCA brand, platform and fixed cost sharing, and its increasing net cash position should improve the company’s already positive financial situation. This may result in dividend increases (current dividend yield is 4-5%).

FCA is a growth story in an otherwise lackluster, high-fixed cost industry. It currently trades at a 7x P/E (17x industry average) and is faced with little debt (0.15 debt/assets). FCAU even trades on a 0.15 PEG. In the case of a recession, the company is well positioned financially, and in terms of product offerings, to weather the tough environment. Aside from its net cash position, it also only put up 10% of its PP&E as debt collateral, and has access to a $7B credit facility (historically stable liquidity at $20B, or 2x annual SG&A + R&D). Given the economic expansion continues, however, the company has incredible growth potential — it will continue to develop its diversified product offerings and push its untapped geographical penetration in China and LatAm, for example. Its 4.5% dividends can also provide a cushion in the case of minor capital losses.

During the development of this article, I was given an opportunity to drive Alfa Romeo’s flagship sedan, the Giulia (first image) — a four door Italian rebuff of the German status quo. Why the Ramsey Alfa Romeo dealer trusted me with a $50,000 stallion is beyond the point — the vehicle drove on rails, a crystal clear step above your neighbor’s vanilla Benz. As I carved through North Jersey’s twisting and turning roads, I realized the Alfa (mind you, this is the “regular” Giulia, not the $80,000 sports version) went through near-hairpin turns at 40mph. If my anecdote is any reflection of the future, then FCA’s looks bright.

Regardless, who doesn’t want a vehicle built Detroit-tough, but with a hint of Italian love?

Recommendation: BUY at the current price of $13.78 (see updated at article header)