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Rupert Hargreaves
Rupert Hargreaves
Articles (1269)  | Author's Website |

Mohnish Pabrai on Fiat Chrysler

Renowned value investor on the investment case for company

October 17, 2017 | About:

According to Mohnish Pabrai (Trades, Portfolio)s third-quarter letter to investors of the Pabrai funds, the renowned value investor has less than 12% of his equity portfolio allocated to U.S. equities with the rest invested in overseas assets. India is an area of particular interest, but Europes Fiat Chrysler (NYSE:FCAU)(MIL:FCA) is his most-loved stock.

Fiat has been one of Pabrais top positions for years, and despite the 70% runup in the value of the stock year to date, he still believes the automaker has more to give.


Pabrais long thesis is based on three different prongs. First, the stock is undervalued thats easy for most investors to see. Right now the shares are trading at a forward price-earnings (P/E) of 6.2 and EV/EBITDA ratio of only 2.9. The industry medians are around 12 and 8.

Second, the company is run by an astute management team thats set on creating value for investors. At the top of the pyramid is CEO Sergio Marchionne:

If one had invested ~$1 million in Alusuisse when he became CEO in 1996 and then kept moving those funds as Sergio moved, that $1 million would be worth north of $30 million today. And that includes 12 of those 20 years spent in the lousy car business with zero prior experience in the auto industry. By 2019, when he intends to hang up his boots and study theoretical physics (yes, thats right!), that $1 million will likely have grown to over $100 million.

When Marchionne came to Fiat in 2004, it was on life support and almost bankrupt. It had cycled through three chairmen, five CEOs and three heads of Fiat Auto in the previous four years. He nursed it back to health and solid profits so that, in 2009, when the much larger Chrysler was nearly liquidated by the U.S. government and the lights were about to be shut off in Detroit, he was there to pick up the pieces. And he negotiated the purchase with no cash going from Fiat to Chryslers owners. If there is a better negotiator than Sergio on the planet, I am not aware of it. Mohnish Pabrai

The decision to spin off Ferrari (NYSE:RACE) is the primary example of Marchionnes wealth creation. Since the spin, Ferrari has risen 140% excluding dividends.

The third prong is growth. Fiat Chrysler is targeting ambitious growth and sales targets for 2018, and, unlike many other firms, the business is focused on cash:

Fiat has guided for $4.50 a share in earnings in 2018. The stock is about $8 and thats a price-earnings multiple of 2. What do I think the company is worth? At some point probably in the 2018 to 2020 time frame the company is going to sell itself. It will be very surprising to me to find Fiat not trading for at least $20 a share by 2018. If they do a deal, it would be north of $30.

They have a parts business that is on track to produce $500 million in cash flow. That business is probably worth more than $5 billion, or something like 50% of their market cap. Fiat has an exceptional management that has taken steps, like spinning out Ferrari, to unlock value that wasnt visible to the market. Theyll probably sell or spin off the parts business. If at some point they do something with Maserati or Jeep, the valuation goes above $20 to $30 a share. Source

And the sum-of-the-parts/cash flow figures:

Heres a sum-of-the-parts pretax cash flow forecast for 2018:

  • Jeep: $4 billion.
  • RAM: $3 billion.
  • Fiat Comm: $1.5 billion.
  • Minivans: $750 million.
  • Maserati: $250 million.
  • Parts: $500 billion.
  • Fiat 500, Alma Romeo and all other brands: $0.

On an after-tax basis this is $7 billion. Sergios own guidance is for $5.2 billion to $6 billion. I believe his numbers are conservative and will be revised upward. By 2018, the company will have over $5 billion in net cash. If they have sold Marelli by then, they may have $9 billion to $10 billion in net cash. If they do generate $7 billion ($5.40 per share) in cash flow in 2018, the market cap will likely be north of $35 billion ($27 per share). It is less than $8.5 billion today. A business that generates $5 billion to $7 billion in cash flows is not going to change hands at $8 billion. Pabrai funds letter to investors.

Im a massive fan of Pabrai, and his analysis for Fiat is spot on. The company is undervalued, and all numbers are based on managements guidance. The group is led by a proven wealth creator, not a businessman who runs the firm for himself, but one thats created millions in equity for investors.

Even after rising 70% year to date, theres still a wide margin of safety here. As a value play, it could be one of the best around today.

Disclosure: The author does not own any share mentioned directly.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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