Fiat Chrysler Automobiles (NYSE:FCAU) is one of the most beloved stocks of Greenhaven Road Capital. The hedge fund recently released its Q3 investor letter (you can download a copy here) in which it discussed its investment thesis on Fiat Chrysler Automobiles as well as four other companies. We have already covered the fund’s thesis on Etsy Inc. and TripAdvisor. In this article, we’re going to take a look at why Greenhaven is bullish on Fiat Chrysler Automobiles, which is the seventh-largest automaker in the world.
Scott Miller, who manages Greenhaven Road, said in the letter to investors:
Despite share price gains for FCAU of over 80% this year, I believe the company remains substantially undervalued.
Fiat is led by one of the smartest operators in business today: Sergio Marchionne. Just because he is smart does not mean that he does not make mistakes or is not subject to industry cycles, but let’s look at the following fact pattern.
In 2014, the company’s five-year plan outlined significant investments that would lead to the accumulation of a significant (€5B+) net cash position by the end of 2018 plus the generation of €9B in EBIT, up from €7B this year and €3.8B in 2014. Sergio has had dozens of chances to walk back the 2018 plan and push it out a year or two. However, he publicly confirmed the forecasts as recently as two weeks ago at a Ferrari event. One reason he may have reconfirmed the plan is that it was built on the U.S. new car market of approximately 16M units (SAAR), which will likely prove conservative for 2018 given the current run rate and the replacements from hurricanes.
Sergio has also indicated that Fiat is working on spinning off the parts business, which grew revenue in excess of 10% last quarter and generated a full-year run-rate EBIT of in excess of €500M. If we put an 8x multiple on the parts business, the spinoff should be worth €4B. Add that to the anticipated net cash of €5B, and we are left with a core auto business that, according to the plan (which may be conservative), will generate €8B+ in EBIT next year.
FCA’s share price is currently below €15. At the end of 2018, the cash and parts business should represent €6+ per share of value and the core business should add a bit over €5 EBIT per share if it generates €8B in EBIT overall. So, if the plan and the share price both hold, Fiat’s core business, ex-parts and cash, will be trading below 2x EBIT. Of course, the plan may not hold and this math exercise may prove useless, but if they come anywhere close, there remains an enormous amount of value in Fiat Chrysler.
Additionally, as the balance sheet strengthens, buybacks or dividends become real possibilities and the company would be an accretive acquisition to any number of manufacturers.
Fiat Chrysler Automobiles (NYSE:FCAU) is a giant multinational auto group that is listed on the New York Stock Exchange (FCAU) and Borsa Italiana in Milan (FCA). Exor S.p.A, an Italian investment group controlled by the Agnelli family, holds a 29.19% stake in the automaker and controls 44.31% through a loyalty voting mechanism.
For the third quarter ended September 30, Fiat Chrysler Automobiles reported a 2% year-over-year decrease in net revenues to €26.4 billion. However, its adjusted net profit rose 25% year-over-year to €922 million.
Fiat Chrysler Automobiles is a popular stock among hedge funds tracked by Insider Monkey. There were 28 funds – including Segantii Capital and Stevens Capital Management – in our database with bullish positions in the automaker.