1 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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Fiat Chrysler Automobiles (FCA) - Long Plus: Total Debt ... · 9/26/2016 · 3 Recommendation: Fiat Chrysler Automobiles (FCA) represents a contrarian opportunity to buy a good business
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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