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James Li
James Li
Articles (630)  | Author's Website |

Mohnish Pabrai’s Auto Companies Showing Good Growth Potential in 2nd Half of 2018

Ferrari and Fiat Chrysler have good profit margins and favorable cash conversion cycles

Mohnish Pabrai (Trades, Portfolio)’s two U.S.-listed holdings, Ferrari NV (NYSE:RACE) and Fiat Chrysler Automobiles NV (NYSE:FCAU), offer good profitability potential among top automobile manufacturing companies.

Brief summary of Pabrai’s portfolio and auto manufacturing industry

Pabrai’s public portfolio represents less than 30% of the guru’s total discretionary assets under management, according to his latest ADV filing with the Securities and Exchange Commission. As of March, the portfolio contains two companies: Ferrari and Fiat Chrysler. Both companies operate in the automotive industry, which includes companies engaged in the design, production and marketing of passenger automobiles and lightweight trucks. Auto manufacturers compete on various factors, including price, brand recognition, type and quality.

According to Investopedia, key financial metrics for auto manufacturers include the gross margin, return on equity, days inventory, days sales outstanding and the cash conversion cycle. Investopedia mentions that the cash conversion cycle equals the sum of days inventory and days sales outstanding, minus the days accounts payable. The more negative a company’s cash conversion cycle, the more efficient management is to “employ short-term assets and liabilities to generate cash for the company.”

Ferrari

Maranello, Italy-based Ferrari designs and manufactures luxury performance sport cars, including F12berlinetta, Ferrari 488 GTB, 488 Spider and 458 Speciale. GuruFocus ranks Ferrari’s profitability 9 out of 10 as the company’s profit margins and returns are near a 10-year high and outperform over 90% of global competitors. The website also lists two positive investing signs for Ferrari: expanding operating margins and a Piotroski F-score of a perfect 9.

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As Table 1 illustrates, Ferrari’s days sales outstanding and days payable rank higher than 80% of global competitors.

Financial metric

Value

Global industry median

Percentile

Gross margin

52.03%

20.92%

94.00%

Return on equity

84.64%

9.51%

99.00%

Piotroski F-score

9

Days sales outstanding

27.89

61.46

83.00%

Days inventory

93.87

59.65

34.00%

Days payable

146.65

60.32

89.00%

Cash conversion cycle

-24.89

Table 1: Financial metrics for Ferrari

Fiat Chrysler

Headquartered in the U.K., Fiat Chrysler manufactures a wide range of automobiles, including passenger cars, light commercial vehicles, components and production systems. The company’s profitability ranks 7 out of 10: Fiat Chrysler’s operating margin outperforms just 50% of global competitors despite reaching a 10-year high of 6.59%. GuruFocus ranks Fiat Chrysler’s business predictability 2.5 stars out of five and lists two positive investing signs: expanding operating margins and a strong Piotroski F-score of 7.

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As Table 2 illustrates, Fiat Chrysler’s days sales outstanding of 8.65 outperforms 94% of global competitors. The U.K.-based auto manufacturer’s cash conversion cycle is slightly better than Ferrari’s as Fiat Chrysler has lower days sales outstanding and days inventory.

Financial metric

Value

Global industry median

Percentile

Gross margin

15.24%

20.92%

30.00%

Return on equity

18.99%

9.51%

75.00%

Piotroski F-score

7

Days sales outstanding

8.65

61.46

94.00%

Days inventory

51.71

59.65

60.00%

Days payable

89.37

60.32

70.00%

Cash conversion cycle

-29.01

Table 2: Financial metrics for Fiat Chrysler

A brief walkthrough of the industry overview page

In April, GuruFocus launched detailed industry overview pages for over 60 industries across 11 market sectors as defined by Morningstar Inc. (NASDAQ:MORN). We provide the industry overview pages for several global regions, including the U.S., the U.K, Europe, Asia, Latin America, Oceania, Africa and India.

Figure 1 shows a sample industry overview page for the U.S. automotive industry, which includes top brands like Ford Motor Co. (NYSE:F), General Motors Co. (NYSE:GM) and Tesla Inc. (NASDAQ:TSLA). Likewise, Figures 2 and 3 show the top auto manufacturers for Europe and Asia.

Figure 1: Top U.S. auto companies

Figure 2: Top European auto companies

Figure 3: Top Asian auto companies

As illustrated in Figure 1 above, the header includes a gray bar listing all of the available regions. You can click on a specific region to view the top auto companies in that region.

Disclosure: No positions.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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