fiat chrysler automobiles (fca) - long plus: total debt ... · 9/26/2016 · 3 recommendation:...
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Fiat Chrysler Automobiles (FCA) - Long
Sum-of-the-parts implies 102% upside in base case
in millions of Euros, except per share amounts
Price: EUR 5.90
FD Shares: 1,538.8
Market Cap: 9,079
Less: Cash & Short term investments (19,074)
Plus: Total Debt 25,374
Plus: Unfunded Pension 5,100
Plus: Minority Interest 194
TEV 20,673.0
Book Value of Common Equity 16,575
Plus: Total Debt 25,374
Plus: Minority Interest 194
Plus: Pref. Equity 0
Total Capital 42,143.0
Excluding Chrysler Including Chrysler
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenue Including Ferrari 59,380 50,102 35,880 74,949 83,957 86,624 96,090 113,191
% Growth -16% -28% 12% 3% 11% 18%
Revenue Excluding Ferrari 57,459 48,324 33,980 72,649 81,557 84,289 93,640 110,595 102,560 103,888 104,662 106,902
% Growth -16% -30% 12% 3% 11% 18% -7% 1% 1% 2%
Adjusted EBIT Including Ferrari 3,362 1,058 1,112 2,392 3,541 3,521 3,766 5,267
% Sales 5.64% 2.11% 3.10% 3.19% 4.22% 4.06% 3.92% 4.65%
Adjusted EBIT Excluding Ferrari 3,023 820 809 2,080 3,191 3,157 3,362 4,794 5,402 5,659 5,771 6,137
% Sales 5.08% 1.70% 2.38% 2.86% 3.91% 3.75% 3.59% 4.33% 5.27% 5.45% 5.51% 5.74%
Maserati Revenue 825 448 586 588 634 1,659 2,767 2,411 2,319 2,783 3,006 3,186
% Growth -45.70% 30.80% 0.34% 7.82% 161.67% 66.79% -12.87% -3.80% 20.00% 8.00% 6.00%
Maserati Adjusted EBIT 72 11 24 40 42 106 275 105 135 181 213 255
% Sales 2.46% 4.10% 6.80% 6.62% 6.39% 9.94% 4.36% 5.80% 6.50% 7.10% 8.00%
Magneti Marelli Revenue 5,447 4,528 5,402 5,860 5,828 5,988 6,500 7,262
% Growth -16.87% 19.30% 8.48% -0.55% 2.75% 8.55% 11.72%
Magneti Marelli Adjusted EBIT 174 25 98 181 140 166 204 321
% Sales 0.55% 1.81% 3.09% 2.40% 2.77% 3.14% 4.42%
Total shipments (000s) Including Ferrari 2,344 2,255 2,211 3,966 4,223 4,352 4,608
Total Shipments (000s) Excluding Ferrari 2,337 2,248 2,205 3,959 4,215 4,345 4,601 4,610 4,533 4,586 4,618 4,713
-4% -2%
ROIC 5.4% 1.7% 1.4% 3.8% 5.4% 5.93% 5.92% 8.54%
Consensus WACC: ~9%
Net Debt/EBITDA 1.6x 1.6x 0.8x 0.8x
Total Debt/Equity 241% 246% 172% 151%
Net Industrial Debt 6,646 7,654 6,000 5,500
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Recommendation: ........................................................................................................................... 3
Situation Overview & Investment Thesis: ...................................................................................... 3
Business Overview: ........................................................................................................................ 5
Segment Overview: ......................................................................................................................... 7
Management’s credibility has improved as it executes on 2014-2018 Business Plan:................. 11
Industry Overview: ....................................................................................................................... 11
Margin of Safety: .......................................................................................................................... 14
Valuation: ...................................................................................................................................... 14
Catalyst: ........................................................................................................................................ 16
Risks:............................................................................................................................................. 19
Conclusion: ................................................................................................................................... 22
Appendix & Sources: .................................................................................................................... 23
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Recommendation:
Fiat Chrysler Automobiles (FCA) represents a contrarian opportunity to buy a good business at a
great price. 2018 price target of 12.16 Euros; 102% upside and -19% potential downside. 2019
price target of 13.68 Euros; 127% upside and -20% potential downside. Basis of valuation is a
sum-of-the-parts analysis using multiples based on comparable multiples in line with historical
range of FCA’s trading multiples and estimates. Multiple in-line with historical average is
justified as FCA continues to grow and expand its margins.
Situation Overview & Investment Thesis:
Why does this opportunity exist? Bull vs. Bear: FCA has underperformed because it
remains behind peers on key metrics such as product portfolio, rationalized platforms,
cost base and balance sheet strengths. There are doubts of whether Sergio can hit 2018
guidance.
o Lower North American margins and higher industrial net debt relative to GM and
Ford have been the primary overhang on FCA’s valuation.
o Furthermore, fears of “peak auto” began in the beginning of 2016 as investors
were worried that the U.S. auto market couldn’t keep growing as it has in prior
years.
o Cyclicality and weakness of FCA compared to peers is overblown and has created
much uncertainty around FCA, particularly in the short term. As FCA continues
to realign production in NAFTA towards higher margin jeeps and trucks, NAFTA
margins will become in line with competitors, helping FCA deleverage to a net
industrial cash position by 2018. Even if the market is right and we are heading
into a recession, much of this “bad outcome” is already priced into FCA’s share
price, providing a margin of safety.
FCA is misunderstood by investors. FCA has improved operations, particularly in North
America, compared to GM and Ford, yet still trades at a discount to its peers. FCA trades
significantly below its breakup value and management has already demonstrated a
willingness to create shareholder value by taking steps to unlock the hidden value of its
assets with the spinoff of Ferrari. Other potential levers include the spinoff or sale of
Maserati or the components division which has already received a buyout offer in 2015.
This is a contrarian investment since many automotive experts believe that we are at the
peak of the cycle. I argue later in this report that we are in mid-cycle for NAFTA, and
even if we are at the peak of the cycle, much of the downside in already priced into
FCA’s stock price, providing a margin of safety.
With FCA trading at 1.8x TEV/EBITDA, and 3.7x TEV/EBIT, the market is not giving
any credit for a successful execution of the 2018 Business Plan. Even partial success of
the plan could generate substantial shareholder value.
Event FCA Drawdown vs. Current YTD
The Great Recession -71.7% -53.0%
"Grexit" Eurozone Crisis -48.8% -53.0%
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The stock has traded roughly in this range since the beginning of the year, and I believe
there is limited downside given the many levers Sergio has to create shareholder value
and the fact that FCA’s current YTD stock performance is almost as bad as it was during
the Great Recession, indicating that many potential bad outcomes are already priced into
FCA stock price, providing a margin of safety.
FCA has best in class management that are owner managers. The CEO, Sergio
Marchionne’s stock ownership level is 51 times his base salary, compared to two times
for typical market practice stock ownership levels. The Agnelli family, through Exor,
own a 29.15% shareholding interest in the common stock.
FCA is ahead of target to hit its 2018 Business Plan; part of the plan calls for a net
industrial cash position, providing liquidity in a “worst case scenario”. As FCA is ahead
of target to meet its 2018 Business Plan, it becomes more likely that Sergio will return
capital to shareholders or create value in other ways.
FCA Executive Directors are properly incentivized, with short term variable pay
comprised of three equally-weighted metrics, Adjusted EBIT, Adjusted net profit, and
Net industrial debt. All long-term equity rewards are based on achievements of 2014-
2018 business plan financial targets.
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Limited downside due to potential spinoff or sale of Maserati and the components
segment, which combined are worth over half the current market cap. Vehicle segment
excluding Maserati alone is worth 24,316 million Euros in the base case, minimizing
downside. Historically, buyout funds, Volkswagen and other players have expressed
interest in Maserati and bids for the components business. Sale of the components
business may be imminent because Sergio has stated that in the medium and long term it
doesn’t fit with FCA’s core business. Furthermore, FCA has great brands that are taking
share in key markets.
o My recent channel checks with Maserati dealerships indicate strong and continued
consumer interest towards Maserati, particularly Levante. For instance, Helfman
Maserati, Maserati of Charleston, Jim Ellis Maserati and Bennett Maserati of
Allentown have stated that the level of consumer interest has been good, that
Maserati is viewed as an exotic and exclusive brand though some dealers have
stated that Maserati is now seen as more attainable because consumers are
becoming more educated about the brand through word of mouth and referrals.
However, one dealership stated that many consumers try Maserati only after they
have tried every other brand.
Automobile industry is ripe for consolidation, particularly after Sergio’s presentation
entitled Confessions of a Capital Junkie, and FCA is poised to benefit. Sergio’s
presentation renewed debate about consolidation in the auto industry and sparked a round
table discussion with prominent figures in the industry such as Bo Andersson, Arndt
Ellinghorst, John Krafcik, Bob Lutz, Tim Manganello and Andy Palmer. Many of them
agreed that consolidation made sense including Bob Lutz, a former GM Chairman, who
stated that a combination of GM and FCA makes sense. GM, whom Sergio thinks is the
best strategic fit for FCA, could pay up to 20.15 Euros for FCA assuming a 50% cash
50% debt deal. Details provided under catalyst section below.
Business Overview:
FCA is an international automotive group engaged in designing, engineering, manufacturing,
distributing and selling vehicles, components and production systems. FCA is the seventh largest
automaker in the world based on total vehicle sales in 2015 with operations in approximately 40
countries. FCA sells their vehicles directly or through distributors and dealers in more than 150
countries. FCA designs, engineers, manufactures, distributes and sells vehicles for the mass
market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and
Ram brands and the SRT performance vehicle designation. FCA supports their vehicle sales by
after-sales services and parts worldwide using the Mopar brand for mass market vehicles. FCA
makes available retail and dealer financing, leasing and rental services through their subsidiaries,
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joint ventures and commercial arrangements. In addition, FCA designs, engineers, manufactures,
distributes and sells luxury vehicles under the Maserati brand, which FCA supports with
financial services provided to FCA’s dealers and retail customers through their subsidiaries, joint
ventures and commercial arrangements. FCA also operates in the components and production
systems sectors under the Magneti Marelli, Teksid and Comau brands.
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Segment Overview:
Activities are carried out through six reportable segments: four regional mass-market vehicle
segments (NAFTA, LATAM, APAC and EMEA), Maserati, the global luxury brand segment,
and a global Components segment.
Geographic Industrial EBIT Walks FY 2012 FY 2013 FY 2014 FY 2015 FY 2016e
Estimates
Starting 1,770 2,741 2,540 2,151 4,450
Volume & Mix 839 588 1,129 1,164 563
Mix
Pricing 488 868 411 736 (86)
Industrial Cost Savings (346) (1,456) (1,577) (342) (120)
SG&A (107) (90) (29) (5) 17
Investments / FX / Other 97 (111) (323) 746 132
Ending 2,741 2,540 2,151 4,450 4,956
Variable Margin on Volume 25% 25% 25%
Pricing as % of Sales 1.1% 1.9% 0.8% 1.1% -0.1%
Raw Materials as % of Sales
Starting 1,385 1,032 499 289 (87)
Volume & Mix 89 (111) (228) (344) (131)
Mix 80
Pricing (91) 64 381 279 28
Industrial Cost Savings (174) (257) (441) (216) 86
SG&A (86) (37) (29) (125) 55
Investments / FX / Other (91) (192) 107 30 (12)
Ending 1,032 499 289 (87) 19
Variable Margin on Volume 25% 25% 25%
Pricing as % of Sales -0.8% 0.6% 4.4% 4.3% 0.5%
Raw Materials as % of Sales
Starting 119 255 318 526 41
Volume & Mix 187 423 494 (344) (265)
Mix
Pricing 45 (79) (142) (126) 31
Industrial Cost Savings (60) (106) (54) (53) 39
SG&A (91) (72) (111) 72 75
Change of JV Income (China) 66
Investments / FX / Other 55 (103) 21 (34) 28
Ending 255 318 526 41 15
Volume ex China JVs (including China imports) 220 149 93
Volume ex China JVs YoY Grow th % -32% -38%
Implied Margin ex China JVs % -0.3% -3.8%
Variable Margin on Volume 25% 15% 20%
Pricing as % of Sales 1.4% -1.7% -2.3% -2.6% 0.9%
Raw Materials as % of Sales
Starting (897) (737) (520) (118) 208
Volume & Mix (484) 77 174 400 303
Mix
Pricing (196) (172) (85) 101 (92)
Industrial Cost Savings 253 139 166 (187) 49
SG&A 196 199 (67) (91) (85)
Investments / FX / Other 390 (26) 214 103 8
Ending (738) (520) (118) 208 390
Variable Margin on Volume 25% 25% 25%
Pricing as % of Sales -1.1% -1.0% -0.5% 0.5% -0.4%
Raw Materials as % of Sales
NA
FT
AL
AT
AM
AP
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EM
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NAFTA:
Includes mass-market vehicle sales for the U.S. (2.244 million units sold and 12.6%
market share, in 2015), Canada (293 thousand units sold and 15.2% market share in
2015), Mexico and other (87 thousand units sold and 6.3% market share in 2015).
U.S. automotive market sales have steadily improved after a sharp decline from 2007 to
2010. U.S. industry sales, including medium- and heavy-duty vehicles, increased from
10.6 million units in 2009 to 17.8 million units in 2015, an increase of approximately 68
percent. Both macroeconomic factors, such as growth in per capita disposable income
and improved consumer confidence, and automotive specific factors, such as the
increasing age of vehicles in operation, improved consumer access to affordably priced
financing and higher prices of used vehicles, contributed to the strong recovery. FCA’s
vehicle sales and profitability in the NAFTA segment are generally weighted towards
larger vehicles such as utility vehicles, trucks and vans, while overall industry sales in the
NAFTA segment generally are more evenly weighted between smaller and larger
vehicles.
FCA’s dependence within the NAFTA region on pickup trucks, larger utility vehicles and
minivans is expected to increase further as FCA intends to shift production in that region
1 Revenue and EBIT do not include other activities and unallocated items & adjustments
% of Vehicle Segment Revenue
Revenue 2012 2013 2014 2015
NAFTA 52% 53% 55% 63%
LATAM 13% 11% 9% 6%
APAC 4% 5% 7% 4%
EMEA 21% 20% 19% 18%
Luxury and Performance Brands 3% 4% 6% 3%
Components and Production Systems 10% 9% 9% 9%
% of Vehicle Segment EBIT
EBIT 2012 2013 2014 2015
NAFTA 73% 77% 59% 90%
LATAM 30% 17% 8% -2%
APAC 7% 11% 15% 1%
EMEA -22% -17% -3% 4%
Luxury and Performance Brands 12% 16% 19% 5%
Components and Production Systems 5% 5% 8% 8%
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away from compact and mid-size passenger cars. This favorable product mix change has
and is expected to continue boosting margins.
LATAM:
Includes mass-market vehicle sales for Brazil (483 thousand units sold and 19.5% market
share, in 2015), Argentina (74 thousand units sold and 11.9% market share in 2015), and
other LATAM (27 thousand units sold and 2.7% market share in 2015).
The automotive industry within which the LATAM segment operates decreased 20.7
percent from 2014, to 4.1 million vehicles (cars and light commercial vehicles) in 2015
reflecting continued macroeconomic weakness in the region with a decrease of 25.6
percent in Brazil and a decrease of 5 percent in Argentina.
APAC:
Includes vehicle sales for China (139 thousand units sold and 0.8% market share, in
2015), India (9 thousand units sold and 0.3% market share in 2015), Australia (35
thousand units sold and 3.1% market share in 2015), Japan (17 thousand units sold and
0.4% market share in 2015), and South Korea (7 thousand units sold and 0.4% market
share in 2015).
The automotive industry in the APAC segment has shown strong year-over-year growth.
Industry sales in the five key markets (China, India, Japan, Australia and South Korea)
where we compete increased from 16.1 million in 2009 to 28.2 million in 2015, a
compound annual growth rate (“CAGR”) of approximately 10 percent. Industry demand
increased 5 percent with growth in China (8 percent), India (8 percent), South Korea (11
percent), Australia (4 percent), offsetting a 10 percent decline in Japan.
APAC segment represents a significant growth opportunity.
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EMEA:
Includes vehicle sales for Europe (217 thousand units sold and 11.3% market share, in
2015), and other EMEA (77 thousand units sold and market share in 2015 was not
material).
In 2015, there was an improvement in passenger car industry volumes in Europe
(EU28+EFTA), with industry unit sales increasing 9.2 percent over the prior year to a
total of 14.2 million, although still below the pre-crisis level of approximately 16 million
units in 2007. As a result of production over-capacity, however, significant price
competition among automotive OEMs continues to be a factor, particularly in the small
and mid-size segments.
Maserati:
This is FCA’s luxury vehicle brand.
In 2015, 37% of its sales came from the U.S., 5% from Japan, 22% from China, and 22%
from other countries. In 2015, a total of 31.5 thousand Maserati vehicles were sold to
retail customers, a decrease of 4.1 percent compared to 2014, primarily due to decreased
volumes of the Quattroporte resulting from weaker segment demand in the U.S. and
China.
Components:
FCA sells components and production systems under Magneti Marelli, Comau, and
Teksid. Components compromises production and sale of lighting components, body
control units, suspensions, shock absorbers, electronic systems, and exhaust systems and
activities in powertrain (engine and transmissions) components, engine control units,
plastic molding components and in the after-market carried out under the Magneti Marelli
brand name; cast iron components for engines, gearboxes, transmissions and suspension
systems, and aluminum cylinder heads under the Teksid brand name; and design and
production of industrial automation systems and related products for the automotive
industry under the Comau brand name.
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Management’s credibility has improved as it executes on 2014-2018 Business
Plan:
Industry Overview:
According to Greenwood Investors, U.S. not at peak auto:
The U.S. is not at peak-auto sales because we haven’t seen any incentive activity outside
of select sedans, particularly in the luxury space as Volkswagen is trying to offload Audis
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in the wake of the diesel emissions scandal, and Mercedes and BMW still try to compete
against each other for volumes titles.
Given the dramatic shift, particularly in the baby-boomer generation, away from sedans
to crossovers and small SUVs, factories that are able to churn out crossovers, trucks and
SUVs are running flat-out. There is very little excess capacity in North America to pump
out a significantly higher number of crossovers and SUVs without repurposing plants.
Incentives wars don’t begin when an industry is running at full capacity. They only begin
as weaker players with excess capacity imagine that their competitors won’t notice their
heavier incentives and higher volumes.
The one exception to the “full capacity,” argument is in the car segments, particularly in
the compact and luxury space, where significant new products have been developed as
every automaker has focused on raising margins through their own refreshed offering.
If we population-adjust auto sales over the last multiple decades, we can see that the
current industry selling levels are at a population-adjusted mid-cycle level.
In the more immediate term, the U.S. is still catching up from pent-up demand created
during the Great Recession, and this is without new homes sales having recovered.
Construction activity, a long-time driver of truck sales, has been robust lately, but still
relatively low compared to the previous decade.
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Estimated Implicit Demand for 2015 is based on an estimation that years of lower net
new drivers on the road has significantly rebounded in 2015. The rationale is that
scrappage rates of vehicles are very low in the context of robust demand for new and
used vehicles. Additionally, these incremental vehicle sales are not coming because of
aggressive incentives activity or at the expense of used car sales. Pricing on used vehicles
remains incredibly and surprisingly robust - another reason there haven’t been any need
for a significant increase in incentives activity among the OEMs.
Automotive OEMs are able to benefit from economies of scale by leveraging their
investments and activities on a global basis across brands and models. The automotive
industry has also historically been highly cyclical, and to a greater extent than many
industries, is impacted by changes in the general economic environment. In addition to
having lower leverage and greater access to capital, larger OEMs that have a more
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diversified revenue base across regions and products tend to be better positioned to
withstand industry downturns and to benefit from industry growth.
Most automotive OEMs produce vehicles for the mass market and some of them also
produce vehicles for the luxury market. Vehicles in the mass market are typically
intended to appeal to the largest number of consumers possible. Intense competition
among manufacturers of mass market vehicles, particularly for non-premium brands,
tends to compress margins, requiring significant volumes to be profitable. As a result,
success is measured in part by vehicle unit sales relative to other automotive OEMs.
Luxury vehicles on the other hand are designed to appeal to consumers with higher levels
of disposable income, and can therefore more easily achieve much higher margins. This
allows luxury vehicle OEMs to produce lower volumes, enhancing brand appeal and
exclusivity, while maintaining profitability.
In 2015, 87 million automobiles were sold around the world. Although China is the
largest single automotive sales market with approximately 19 million passenger cars sold,
the majority of automobile sales are still in the developed markets, including North
America, Western Europe and Japan. Growth in other emerging markets has also played
an increasingly important part in global automotive demand in recent years.
Since 2009, manufacturers generally have worked to maintain a reduced reliance on
pricing-related incentives as competitive tools in the North American market, while
pricing pressure, under different forms, is still affecting sales in the European market
since the inception of the financial crisis.
Margin of Safety:
FCA is worth substantially more in parts than as a whole.
o Management has already demonstrated a willingness to create shareholder value
by taking steps to unlock the hidden value of its assets such as with the spinoff of
Ferrari. Other potential levers include the spinoff or sale of Maserati and the
components division which has already received a buyout offer in 2015.
FCA has staying power because it’s well capitalized and expected to be at a net industrial
cash position by 2018. Furthermore, it has strong brands and a global diversified revenue
stream across products, making it better able to wither industry downturns and benefit
from industry growth.
Valuation:
Valuing FCA using sum-of-the-parts.
Vehicle segments, not including Maserati, provides most of the revenue and adjusted
EBIT. Sales and margins are volatile due to cyclical nature of the automotive industry.
However, FCA has global presence, and macroeconomic weakness in some regions are
offset by continued economic strengths in other regions.
Maserati, FCA’s luxury vehicle brand, provides more stable revenue and adjusted EBIT
and has higher margins.
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The components section provide stable revenue and adjusted EBIT margins which is less
cyclical than vehicle sales.
2
2 Comps for vehicle segment: Volkswagen AG, General Motors Company, Nissan Motor Co. Ltd., Ford Motor Co., Peugeot S.A. Comps for luxury segment: Daimler AG, BMW, Harley Davidson
2018 SOTP - Unit Economics Snapshot
Vehicle Segments Bear Base Bull
Shipments (000s) 4,177 4,573 4,849
2018 Net Revenue 93,245 101,656 108,244
2018 Adjusted EBIT 4,443 5,174 5,928
Adjusted EBIT % Sales 4.76% 5.09% 5.48%
TEV/EBIT 3.2x 4.7x 5.3x
TEV 14,217 24,316 31,417
As a % of current TEV 68% 116% 151%
Per share 9.24 15.80 20.42
Luxury vehicle Bear Base Bull
Shipments (000s) 45 45 45
2018 Net Revenue 3,006 3,006 3,006
2018 Adjusted EBIT 177 213 299
Adjusted EBIT % Sales 5.88% 7.10% 9.93%
TEV/EBIT 10.4x 11.9x 13.4x
TEV 1,838 2,540 4,000
As a % of current TEV 9% 12% 19%
Per share 1.19 1.65 2.60
Components Bear Base Bull
2018 Net Revenue 9,845 10,099 10,298
2018 Adjusted EBIT 374 384 391
Adjusted EBIT % Sales 3.8% 3.8% 3.8%
TEV/EBIT 8.1x 9.0x 10.0x
TEV 3,012 3,454 3,913
As a % of current TEV 14% 17% 19%
Per share 1.96 2.24 2.54
Total TEV 19,067 30,309 39,330
Fair Equity Value 7,473 18,715 27,736
Implied Share Price 4.86 12.16 18.02
Upside / Downside -19% 102% 199%
Bear: avg. of lowest multiple over past 2 years and 25th percentile of comps,
with 20% discount. Base: avg. of mid historical range and median. Bull:
Avg. of average historical trading range for FCA with high end of comps. All
multiples in line with FCA's trading multiples over past 2 years.
Bear: trading multiple of peers with 20%
discount. Base: average of bear and bull. Bull:
median peer range
$3bn TEV floor for components business based
on PE bids in 2015, stepping it up by 1 turn for
base and bull case
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Catalyst:
Consolidation:
The automotive industry is characterized by significant duplication in product
development costs, much of which does not drive value as perceived by consumers.
Sharing product development costs among manufacturers, preferably through
consolidation, will enable automakers to improve their return on capital employed for
product development and manufacturing and enhance utilization of tooling, machinery
and equipment.
Reduce the number of players in the industry and share the prohibitive costs of building
greener and more intelligent cars.
Sergio Marchionne is a proponent of M&A and alliances, and renewed discussion of
consolidation in the industry in 2015 with his presentation: Confessions of a Capital
Junkie. Sergio and John Elkann say a merger with GM would unlock $10 billion in
synergies.
2019 SOTP - Unit Economics Snapshot
Vehicle Segments Bear Base Bull
Shipments (000s) 3,866 4,602 4,923
2019 Net Revenue 89,227 102,219 110,159
2019 Adjusted EBIT 4,302 5,488 5,910
Adjusted EBIT % Sales 4.82% 5.37% 5.37%
TEV/EBIT 3.2x 4.7x 5.3x
TEV 13,937 26,070 31,560
As a % of current TEV 67% 125% 151%
Per share 9.06 16.94 20.51
Luxury vehicle Bear Base Bull
Shipments (000s) 48 48 48
2019 Net Revenue 3,186 3,186 3,186
2019 Adjusted EBIT 225 255 316
Adjusted EBIT % Sales 7.06% 8.00% 9.93%
TEV/EBIT 10.4x 11.9x 13.4x
TEV 2,338 3,033 4,240
As a % of current TEV 11% 15% 20%
Per share 1.52 1.97 2.76
Components Bear Base Bull
2019 Net Revenue 9,845 10,301 10,607
2019 Adjusted EBIT 345 394 371
Adjusted EBIT % Sales 3.5% 3.8% 3.5%
TEV/EBIT 8.1x 9.0x 10.0x
TEV 2,774 3,542 3,713
As a % of current TEV 13% 17% 18%
Per share 1.80 2.30 2.41
Total TEV 19,049 32,645 39,512
Fair Equity Value 7,455 21,051 27,918
Implied Share Price 4.84 13.68 18.14
Upside / Downside -20% 127% 201%
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In year 2 and beyond, this deal is always accretive on a Pro-Forma and GAAP basis, even
with one third of synergies being realized.
GM, whom Sergio thinks is the best strategic fit for FCA, could pay up to 20.15 Euros for
FCA assuming a 50% cash 50% debt deal.
The combined company would have healthy leverage and coverage ratios, even with 50%
debt funding, and it would also pay off over 50% of the transaction debt over 5 years,
using my financial projections for FCA and equity research projections for GM.
($ in Millions, Except Per Share Amounts in Dollars as Stated)
Management Estimates - Long-Term Synergies:
% Synergies Amount
Technology and product development 70% 7,000.0$
Other opex opportunities 15% 1,500.0$
Cross-selling 15% 1,500.0$
Total Long-Term Synergies: 10,000.0$
Projected
Estimated Annual Synergies Units FY16 FY17 FY18 FY19 FY20
% Synergies Realized: % 0.0% 40.0% 60.0% 75.0% 100.0%
Technology and product development $M -$ 2,800.0$ 4,200.0$ 5,250.0$ 7,000.0$
Other opex opportunities -$ 600.0$ 900.0$ 1,125.0$ 1,500.0$
Cross-selling $M - 600.00 900.00 1,125.00 1,500.00
Total Annual Synergies: $M -$ 4,000.0$ 6,000.0$ 7,500.0$ 10,000.0$
Projected
Combined Income Statement Units FY16 FY17 FY18 FY19 FY20
Earnings Per Share (EPS): $ / Share 5.18$ 5.41$ 4.57$ 4.89$ 4.81$
Accretion / (Dilution) - $: $ / Share (0.61)$ 0.08$ 0.69$ 1.96$ 2.76$
Accretion / (Dilution) - %: % (10.5%) 1.6% 17.7% 67.1% 134.7%
Pro-Forma Earnings Per Share (EPS): $ / Share 5.43$ 5.67$ 4.83$ 5.14$ 5.07$
Pro-Forma Accretion / (Dilution) - $: $ / Share (0.35)$ 0.34$ 0.94$ 2.22$ 3.02$
Pro-Forma Accretion / (Dilution) - %: % (6.1%) 6.4% 24.3% 75.8% 147.2%
18
Even if GM’s cost of debt rises to 5%, from 4.6%, because of the additional issuance of
debt, the transaction turns dilutive at between 15.81 Euros and 17.05 Euros per share.
Given that other OEM’s have leverage ratios closer to 5-6x, GM may even have room to
use additional debt to fund a higher purchase price.
Management has indicated plans to deleverage to a net industrial cash position by 2018.
Since they don’t have any major deals in the pipeline, and with much of NAFTA
realignment towards higher margin jeeps and trucks already completed, FCA may de-
lever faster than expected. Historically, management has shown dedication to
deleveraging, with a recent Moody’s corporate credit rating upgrade in Q2 2016 to
“Stable” outlook, and the rating raised from B1 to Ba3, as well as rating raised to “B1”
from “B2” on bonds issued or guaranteed by FCA.
Potential spinoff of Magneti Marelli:
It does 7,262 million Euros in revenue and 321 million Euros in EBIT. At a 10x multiple,
would be worth 2.09 Euros a share. FCA trades at 5.9 Euros a share.
In 2015, a group including a U.S. buyout fund offered $2.7bn for Magneti Marelli. Sergio
rebuffed them saying he would sell Magneti Marelli for at least 3bn Euros, setting a floor
on the components business of 3bn Euros.
Sensitivity - Year 1 EPS Accretion / (Dilution) - Purchase Price per Share vs. % Debt Used:
% Debt Used:
0.08$ 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
8.37$ 35.0% (0.05)$ (0.01)$ 0.04$ 0.09$ 0.14$ 0.19$ 0.25$ 0.30$ 0.36$
9.61 55.0% (0.14) (0.09) (0.03) 0.02 0.08 0.13 0.19 0.25 0.32
10.85 75.0% (0.23) (0.17) (0.11) (0.05) 0.01 0.08 0.14 0.21 0.28
12.09 95.0% (0.31) (0.25) (0.18) (0.12) (0.05) 0.02 0.09 0.17 0.24
13.33 115.0% (0.39) (0.32) (0.26) (0.19) (0.11) (0.04) 0.04 0.12 0.21
14.57 135.0% (0.47) (0.40) (0.33) (0.25) (0.18) (0.09) (0.01) 0.08 0.17
15.81 155.0% (0.54) (0.47) (0.40) (0.32) (0.24) (0.15) (0.06) 0.03 0.13
17.05 175.0% (0.62) (0.54) (0.47) (0.38) (0.30) (0.21) (0.11) (0.01) 0.09
20.15 225.0% (0.80) (0.72) (0.63) (0.54) (0.44) (0.34) (0.23) (0.12) 0.00
Premium
Paid and Per
Share
Purchase
Price:
Projected
Combined Co. - Key Metrics and Ratios Units FY16 FY17 FY18 FY19 FY20
Total Debt / EBITDA: x 2.1 x 1.6 x 1.4 x 1.0 x 0.8 x
Net Debt / EBITDA: x 1.4 x 0.9 x 0.7 x 0.4 x 0.1 x
EBITDA / Net Interest Expense: x 22.7 x 9.7 x 10.5 x 12.4 x 14.5 x
Total Debt / Equity: x 1.1 x 0.8 x 0.6 x 0.4 x 0.3 x
Total Debt / Capital: % 51.8% 44.0% 36.6% 28.7% 20.7%
Net Debt / Equity: x 0.7 x 0.5 x 0.3 x 0.2 x 0.0 x
Net Debt / Net Capital: % 41.6% 32.4% 23.5% 13.9% 4.1%
Weighted Average Debt Interest Rate:
0.08$ 4.5% 4.6% 4.7% 4.8% 4.9% 5.0% 5.1% 5.2% 5.3%
8.37$ 35.0% 0.38$ 0.36$ 0.33$ 0.31$ 0.29$ 0.27$ 0.25$ 0.23$ 0.21$
9.61 55.0% 0.34 0.32 0.30 0.27 0.25 0.23 0.21 0.19 0.17
10.85 75.0% 0.30 0.28 0.26 0.24 0.21 0.19 0.17 0.15 0.13
12.09 95.0% 0.27 0.24 0.22 0.20 0.18 0.15 0.13 0.11 0.09
13.33 115.0% 0.23 0.21 0.18 0.16 0.14 0.11 0.09 0.07 0.05
14.57 135.0% 0.19 0.17 0.15 0.12 0.10 0.07 0.05 0.03 0.00
15.81 155.0% 0.15 0.13 0.11 0.08 0.06 0.04 0.01 (0.01) (0.04)
17.05 175.0% 0.12 0.09 0.07 0.05 0.02 (0.00) (0.03) (0.05) (0.08)
18.29 195.0% 0.08 0.06 0.03 0.01 (0.02) (0.04) (0.07) (0.09) (0.12)
Premium
Paid and Per
Share
Purchase
Price:
19
Potential spinoff of luxury vehicle brand, Maserati:
Already had successful spinoff of Ferrari. Maserati is now FCA’s most exotic and
exclusive brand.
Morgan Stanley projects Maserati to do 3,639 million Euros in revenue and 255 Euros in
EBIT in 2018. At an 11x multiple, it would be worth 1.66 Euros a share. FCA trades at
5.9 Euros a share.
Continued strong operating performance that will meet or exceed the 2018 business plan:
Sergio increased guidance on his 2018 business plan; one of the items was to have a net
industrial cash position, which would give FCA more staying power and ability to wither
an economic downturn in its major markets.
Return capital to shareholders:
FCA is at the tail end of an investment cycle, with capex trending meaningfully lower.
The 2018 business plan calls for FCA to have a net industrial cash position by 2018,
making it more likely for management to return capital to shareholders.
Risks:
Cyclicality and high operating leverage:
The automotive industry is highly cyclical, and to a greater extent than many industries,
is impacted by changes in the general economic environment.
FCA is more global now and has a more diversified revenue base. FCA is on track to
have a net industrial cash position by 2018 and FCA US has removed its ring-fencing,
enabling free flow of capital within the Group and an increased syndicated RCF from
2.5bn Euros to 5bn Euros, increasing its liquidity.
In addition to having lower leverage and greater access to capital, larger OEMs such as
FCA that have a more diversified revenue base across regions and products tend to be
better positioned to withstand industry downturns and to benefit from industry growth.
FCA has high operating leverage, which makes earnings more sensitive to sales. For
example, assuming constant pricing, mix and cost of sales per vehicle, that all results of
20
operations were attributable to vehicle shipments and that all other variables remain
constant, a ten percent decrease in 2015 vehicle shipments would reduce Adjusted EBIT
by approximately 29 percent for 2015, without considering actions and cost containment
measures FCA may take in response to decreased vehicle sales.
o If Adjusted EBIT were to decrease by 30% and shipments by 10%, compared to a
decrease in shipments of -4% in 2009 and – 2% in 2010, 2018 price target would
be 7.3 Euros, providing 24% upside in the base case.
21
FCA appears to have lower operating leverage on average compared to its peers, given
that it was able to maintain positive EBIT margins during the Great Recession while the
average mainstream OEM was not.
Competition:
The automotive industry is highly competitive in terms of product quality, innovation,
pricing, fuel economy, reliability, safety, customer service and financial services offered.
Global vehicle production capacity significantly exceeds current demand and this
overcapacity has intensified and may further intensify pricing pressures.
Competitors may respond to these conditions by attempting to make their vehicles more
attractive or less expensive to customers by adding vehicle enhancements, providing
subsidized financing or leasing programs, or by reducing vehicle prices whether directly
or by offering option package discounts, price rebates or other sales incentives in certain
markets. In addition, manufacturers in countries that have lower production costs may
choose to export lower-cost automobiles to more established markets.
Autonomous vehicles:
May displace incumbent automobile manufacturers, though unlikely.
22
This scenario is many years down the road.
Manufacturing capacity of incumbents is very capital intensive and most companies that
design autonomous vehicles will not want to replicate the manufacturing capacity of
incumbents. Strategic alliances between incumbent automobile manufacturers and
autonomous vehicle designers is more likely. For instance, Google recently partnered
with FCA on autonomous cars.
Highly unionized workforce:
Fiat Chrysler's workforce is highly unionized, a threat to profits if workers demand wage
increases or refuse labor cuts.
Execution risk of the 2018 Business Plan:
The CEO Sergio acts like an owner manager and is properly incentivized with a
significant stake in the company. He also has a long history of working with the Agnelli
family to turn around businesses.
Rising Oil Prices:
An increased focus on sales of SUVs and trucks could make the world's seventh-biggest
automaker vulnerable to an oil price recovery.
Conclusion:
FCA offers investors a compelling asymmetric risk/reward ratio. Recommend a long position in
FCA with 2018 price target of 12.16 Euros; 102% upside and -19% potential downside. 2019
price target of 13.68 Euros; 127% upside and -20% potential downside using sum-of-the-parts
analysis. FCA trades at a discount to its peers despite strong and improving operating
performance, free cash flow generation, and being on track to have a net industrial cash position
by 2018. I believe a reversion to the mean is likely to occur within the next couple of years as the
company continues delivering strong operating performance and management begins to reward
shareholders through dividends and buybacks. If this reversion doesn’t happen, management has
other levers to unlock value, such as spinning off or selling its components and luxury brands
divisions.
23
Appendix & Sources:
24
25
Projected
Combined Income Statement Units FY16 FY17 FY18 FY19 FY20
Acquirer - Revenue: $M 150,013.9$ 148,866.2$ 140,645.4$ 131,967.9$ 124,217.5$
Target - Revenue: $M 112,508.9 117,659.8 121,547.8 123,952.4 115,174.9
Revenue Synergies: $M - 600.0 900.0 1,125.0 1,500.0
Total Revenue: $M 262,522.8 267,126.0 263,093.2 257,045.3 240,892.4
Acquirer - Cost of Goods Sold: $M 128,093.3 127,746.7 123,448.5 117,594.9 112,392.3
Target - Cost of Goods Sold: $M 95,797.1 98,329.6 100,008.5 99,906.7 92,832.0
COGS Associated w/ Rev. Synergies: $M - 511.7 767.6 959.4 1,279.3
COGS Synergies: $M - (2,800.0) (4,200.0) (5,250.0) (7,000.0)
Total COGS: $M 223,890.4 223,788.0 220,024.6 213,211.1 199,503.6
Gross Profit: $M 38,632.5 43,337.9 43,068.6 43,834.2 41,388.8
% Sales 14.7% 16.2% 16.4% 17.1% 17.2%
Acquirer - SG&A Expense: $M 12,974.9 13,249.1 12,658.1 12,009.1 11,428.0
Target - SG&A Expense: $M 7,328.8 9,004.4 11,355.8 13,343.4 12,398.5
Acquirer - R&D/embedded in another line item:$M - - - - -
Target - R&D: $M 3,590.3 4,040.5 3,895.4 3,888.5 3,604.2
Acquirer - D&A: $M 5,793.7 6,412.7 6,674.7 6,718.4 6,956.2
Target - D&A: 6,084.0 6,754.0 7,360.7 7,328.0 6,911.0
Target - Other Operating Income 6,128.9 6,669.6 6,718.8 7,255.3 6,757.5
Acquirer - Other Operating Income: $M 3,532.1 3,734.4 3,975.9 4,089.3 4,193.7
OpEx Synergies: $M - (600.0) (900.0) (1,125.0) (1,500.0)
Amortization of New Intangibles: $M 95.4 95.4 95.4 95.4 95.4
Depreciation from PP&E Write-Up: $M 366.2 366.2 366.2 366.2 366.2
Operating Income: $M 12,060.0 14,419.7 12,257.1 12,554.8 12,080.5
% Sales 4.6% 5.4% 4.7% 4.9% 5.0%
Acquired - Net Interest Inc. / (Expense): $M (189.0) (283.8) (270.0) (242.9) (235.5)
Target - Net Interest Inc. / (Expense): $M
Foregone Interest on Cash: $M (214.6) (214.6) (214.6) (214.6) (214.6)
Interest Paid on New Debt Issued: $M (614.4) (2,364.5) (2,043.2) (1,699.4) (1,332.5)
Interest Saved on Refinanced Debt: $M - - - - -
Amortization of Financing Fees: $M (80.1) (80.1) (80.1) (80.1) (80.1)
Net Interest Income / (Expense): $M (1,098.1) (2,943.1) (2,608.0) (2,237.0) (1,862.8)
Pre-Tax Income: $M 10,961.8 11,476.6 9,649.1 10,317.7 10,217.7
Income Tax Provision: $M 2,740.5 2,869.2 2,412.3 2,579.4 2,554.4
Net Income: $M 8,221.4 8,607.5 7,236.8 7,738.3 7,663.3
Net (Income) Loss Attrib. to NCI: $M - - - - -
Net Income to Common: $M 8,221.4$ 8,607.5$ 7,236.8$ 7,738.3$ 7,663.3$
Acquirer - Avg. Dil. Shares: M Shares 1,592.900 1,592.900 1,592.900 1,592.900 1,592.900
Shares Issued in Transaction: M Shares 0.000 0.000 0.000 0.000 0.000
Total Diluted Shares: M Shares 1,592.900 1,592.900 1,592.900 1,592.900 1,592.900
Acquirer - Standalone EPS: $ / Share 5.79$ 5.33$ 3.88$ 2.92$ 2.05$
Earnings Per Share (EPS): $ / Share 5.16$ 5.40$ 4.54$ 4.86$ 4.81$
Accretion / (Dilution) - $: $ / Share (0.62)$ 0.07$ 0.66$ 1.93$ 2.76$
Accretion / (Dilution) - %: % (10.8%) 1.4% 17.0% 66.1% 134.6%
Pro-Forma Earnings Per Share (EPS): $ / Share 5.42$ 5.66$ 4.80$ 5.11$ 5.07$
Pro-Forma Accretion / (Dilution) - $: $ / Share (0.37)$ 0.33$ 0.92$ 2.19$ 3.02$
Pro-Forma Accretion / (Dilution) - %: % (6.4%) 6.2% 23.6% 74.9% 147.0%
26
Sources
Greenwood investors for industry overview
FCA presentations
top related