Background
As a company, Fiat Chrysler Automobiles NV (FCAU, Financial) does not focus much on its two namesake brands. After years of evolvement, the automaker now has four major brands: Jeep, RAM, Maserati and Alfa Romeo. The company focuses on these four global brands that are less commoditized and may be less threatened by the evolution of electric and driverless cars.
Fiat Chrysler does not break down sales volume by brand anymore, but from its five-year plan shared in 2014, we can get a rough idea of which brands have the management’s attention. These strategic focuses were largely achieved and are projected to remain consistent for the next five years.
Fiat Chrysler is an Italian-American multinational corporation and the world’s eighth-largest automaker. The group was established in October 2014 by merging Fiat and Chrysler into a new holding company.
Fiat was founded in 1899 in Italy. Over the years, it grew its mass-market brand Fiat as well as luxury brands Ferrari, Maserati and Alpha Romeo. In 2009, Fiat took a 20% stake in Chrysler, which was in Chapter 11, with the rest owned by the U.S. and Canadian governments. Fiat increased its stake in Chrysler in subsequent years until 2014, when the two companies merged.
The company is controlled by the Agnelli family through a holding company called Exor, which owns nearly 30%. Exor also owns PartnerRe, Ferrari, CNH Industrial, Juventus and The Economist. Exor’s chairman and CEO is John Elkann, the chosen heir of his grandfather Gianni Agnelli.
Elkann spun off Ferrari from Fiat Chrysler on Jan. 3, 2016, bought a stake in The Economist in 2015 and PartnerRe in 2016. Joining Exor in 2003, Elkann became the leader of Exor after his grandfather and great-uncle died. In 2003, he hired Sergio Marchionne as CEO, who first turned around Fiat, then Chrysler and was regarded as one of the best chief executives in the automobile industry. Marchionne died unexpectedly in 2018. After his death, Mike Manley took charge. Manley made the Jeep brand Fiat Chrysler’s best-performing brand since being put in charge of it in 2009.
The following table shows the revenue, operating profit and shipment by segment. In brief, Fiat Chrysler is a car manufacturer focusing on light trucks in North America as well as a couple of luxury brands.
It is no surprise that the carmaker has light truck sales driving its profits. Tariffs on imported trucks is one main reason why. Since 1964, the U.S. has imposed a 25% tariff on light trucks, which created a de facto oligopoly in the space. Therefore, the industry structure of light truck manufacturing in the U.S. is much better than for passenger cars.
Why buy the stock?
It is simply too cheap – the stock is at less than 2 times 2018 EBITDA, with a net cash balance sheet.
The company has room for growth from more product offerings and capacity expansion.
The automaker's Jeep and RAM brands are selling very well against competitors. Due to the good performance of its products over the last several years, Fiat Chrysler is planning $45 billion in capital expenditures for 2018 through 2022. As depreciation is currently running at $6 billion, the growth capex is $3 billion per year and can be funded through free cash flow at the current run-rate. The growth capex will be used on new product offerings.
Creating a captive finacing company can bring 20% earnings upside
Unlike its peers GM (GM, Financial) and Ford (F, Financial), Fiat does not have a captive financing company to service its customers in the U.S. Currently, financing is provided through bank agreements. The management team saw the potential to build a financing business into 10% to 25% of total earnings. This looks achievable and could make the sales process better for customers.
It has an active chairman and CEO that can achieve wonders
The company has an owner who cares and knows how to manage its funds and a capable caretaker who has proven himself over the last decade.
Elkann was groomed by his grandfather on family business since he was 29. He has the reputation of a shrewd investor who worships Warren Buffett (Trades, Portfolio). He handpicked Marchionne, an outsider, to turn around Fiat. He and Marchionne bought Chrysler after the financial crisis, and then quickly turned it around by focusing on building key brands and profitability. He spun off Ferrari and sold the parts business Magneti Marelli, creating a lot of value for shareholders.
Current CEO Manley may not be as legendary as Machionne, but he ran one of the company's most important brands, Jeep, from 2009 to 2018. The following chart shows his legacy in Jeep brands. He deserves some credit for more than 2 times EV-EBITDA.
Source: http://carsalesbase.com/
Risks
So, what is the catch?
Traditional cars are being replaced by electric and autonomous vehicles. Car sales will decline when driverless car technology becomes commercialized. This is the future. But Fiat, along with other car companies, is trying to find its own solutions. A portion of capital expenditures will be used on electric car development. At the current valuation, the decline of traditional cars has been largely discounted in Fiat's stock price. The chance of finding a good place in the electric and driverless car world is not.
Trucks are one area that may be less impacted by the transition to electric as they require more power to operate. The following chart shows auto and light truck sales over the last several decades in the U.S. The gray areas mark recessions. Auto sales are, indeed, cyclical. But the good news is the current car sales level does not present a bubble, especially considering how the U.S. population grew from 230 million in 1980 to 325 million today. Management also guided that Fiat Chrysler would break-even[1] if U.S. car sales drop to 12 million units. With a strong balance sheet, the company has a chance of coming out strong when there is a recession.
Source: https://www.macrotrends.net/1372/auto-and-light-truck-sales-historical-chart
In addition, these risks apply to the entire industry. They can be hedged through a paired trade by shorting Ford (or GM), who seems to have a higher valuation but a not much better business.
Disclosure: I own FCAU.
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