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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

Fiat Chrysler: How Much Upside Is Left?

Is there still time to buy the stock or have you missed your opportunity?

February 07, 2018 | About:

Reading through the full-year 2017 letters to investors that have already been published for various hedge funds and well-known institutional investors, there is one value stock that has popped up more than most.

For many value managers, this stock was responsible for the vast proportion of the gains they booked throughout 2017, and many are still holding the business, expecting further profits in 2018.

The company in question is Fiat Chrysler Automobiles (NYSE:FCAU). For 2017, this stock produced a return of around 100% for investors and, in the first few weeks of 2018, has continued to push higher. Following a stumble at the beginning of this week, the stock is now up 105% over the past 12 months.


The question is, does this auto company still have value, or have the shares given up all the gains they have to offer?

Still time to buy?

I must admit, one of my most significant faults as an investor is my inability to buy equities when they have had a substantial run over the past 12 months or so. With that being the case, part of the reason for writing this article is trying to get over my fault and arrive at an estimate of intrinsic value for Fiat based on numbers alone, without taking a look at the stock price. By going through this process, I should hopefully be able to remove my anchoring bias.

In my opinion, there are two ways to value this business: 1) on a free cash flow basis and 2) on a sum-of-the-parts basis.

I am going to tackle free cash flow first as this is my favorite method of value assessment. Five years ago, management at Fiat set out a plan to generate $4.5 in earnings per share for 2018 and have around $5 billion in net cash by the end of the year. Free cash flow of approximately $7 billion, or $5.4 per share, is expected for the year. As things stand currently, it looks as if the company can hit these targets. So if we use a simple price-earnings ratio, compared to the likes of Ford (NYSE:F) and General Motors (NYSE:GM), which trade at an average forward price-earnings of 6.8, the stock could be worth $30.6, substantially higher than the current level of $23.2 -- that's excluding the cash on the balance sheet. In addition, $5 billion in cash works out to around $3.2 per share, which could justify a price of $33.2 in an aggressive scenario.

On a free cash flow basis, it could be argued that any stock with a free cash flow yield more than 10% is attractive. Therefore, Fiat would be attractive all the way up to $54 assuming it hits its cash flow generation target of $5.4 per share for 2018. On these metrics, then, the stock is undervalued by between 31% and 133%.

On a sum-of-the-parts basis, the value is just as clear. Working out a value of the separate parts of the business is never going to be a precise art. Therefore, all the below values should be taken with a degree of skepticism and an appropriate discount applied.

Even though it is one of the group's smallest businesses, Fiat's Maserati brand is likely to attract the highest valuation. Based on the pre-tax cash flow forecast for this business for 2018, assuming a similar price to free cash flow multiple as Ferrari (RACE), this business alone could be worth $10 billion or more.

The other critical parts of the business, such as the Jeep and Dodge Ram brands, are set to produce an estimated pre-tax cash flow of $4 billion and $3 billion for 2018, according to calculations from Mohnish Pabrai (TradesPortfolio). If these two businesses attract cash flow multiples similar to Ford and GM (approximately 3), they could be worth around $21 billion. That leaves four other divisions that together are in-line to produce $2 billion of cash flow this year. Against a market cap of $35 billion at the time of writing, on a sum-of-the-parts basis, it appears the company is undervalued.

Personally, due to the ambiguous nature of this calculation, I would rather use earnings-based figures as sum-of-the-parts values are rarely generally realized. Still, even on this basis it is difficult to argue Fiat is expensive today. According to my figures, even if it rises 100% over the span of the next 12 months, there could be more than 30% upside left if the company achieves its strategic goals for the year and sets new targets.

Disclosure: The author owns no stock mentioned. 

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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