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Jonathan Poland
Jonathan Poland
Articles (397)  | Author's Website |

Dollar-Cost Average in Fiat Chrysler

Stronger-than-expected auto sales should help the company's turnaround efforts

November 01, 2018 | About:

Fiat Chrysler Automobiles (NYSE:FCAU) is off 10% since my first article at the end of August, but Mohnish Pabrai (Trades, Portfolio)'s largest holding still offers the same if not better upside than a month ago.

First, the stock is priced at just four times forward earnings. Second, sales in the U.S. for October were up 16% to 177,391 vehicles compared with sales in October 2017 of 153,373 vehicles. It was good news across most of the company's brands. Outside of Fiat sales, everything else was positive, driven by Jeep, Ram, Chrysler, Dodge and Alfa Romeo brands, which all posted growth in year-over-year sales. Dodge led with a 38% increase.

Fiat made $642 million in net profit during the first quarter after the death of former CEO Sergio Marchionne (the person responsible for the combination of Fiat and Chrysler). However, that figure was dragged down by the diesel emissions scandal, which is expected to cost the company over $800 million. Fiat is facing lawsuits over alleged diesel emissions cheating in an estimated 100,000 Ecodiesel Ram 1500 and Jeep Grand Cherokee vehicles. The company has denied wrongdoing and can easily cover the bill with over $16 billion in cash.

Again, over the last decade, Fiat has gone from losing 830 million euros on 32 billion in sales during 2009 to earning over 3.1 billion euros on 113.7 billion in sales over the last 12 months. In 2019, Fiat is still looking to earn north of $4 per share, which if valued on an industry average price-earnings rate, would put the stock upwards of $50 per share.

Of course, a big fear is that since the industry regularly suffers from overcapacity, which increases pricing pressure and limits profitability, eventually the good times will come crashing down. But that risk could be years out, and Fiat continues the worldwide expansion of its Jeep, Maserati and Alfa Romeo brands, strengthening the company's average revenue per unit. Long term, Fiat should continue to improve costs and drive higher sales and profit. Prices generally rise with inflation, and thus Fiat doesn't have to grow its unit sales that much to experience total revenue growth.

These fears haven't stopped guru investors from buying big stakes. Warren Buffett (Trades, Portfolio) owns over 51 million shares of General Motors. Pzena owns more than 42 million shares of Ford Motor. Mohnish Pabrai (Trades, Portfolio)'s Dalal Street LLC owns 13,109,310 shares (June 13F) in Fiat Chrysler, accounting for more than 82% of its holdings.

More importantly, while most of the major automobile manufacturers including Honda (NYSE:HMC), Ford (NYSE:F), Toyota (NYSE:TM), General Motors (NYSE:GM) and Fiat Chrysler are all undervalued by the market, Fiat still offers the best price appreciation potential. And, with cost benefits from the company's integration with Chrysler yet to be completely realized, the stock is a no-brainer at this point.

Disclosure: I am not long/short any stock mentioned.

Read more here: 

What's Ahead for Fiat Chrysler With Its Latest Deal?

Why Mohnish Pabrai Likes India's Sunteck

Mohnish Pabrai on His Top Checklist Criterion

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager, publisher and stock analyst who helped investors produce market-beating results for over 15 years. Today, I run a private membership for business leaders dedicated to profit and progress.

Visit Jonathan Poland's Website

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