Greenhaven Road Capital recently published its Q2 investor letter to discuss its performance and top positions in the second quarter of 2018. The letter includes the hedge fund’s comments about Fiat Chrysler Automobiles NV (NYSE: FCAU) and five other companies. The fund talked about the potential sale of Magnetti Morelli, among others. According to the fund’s founder and portfolio manager Scott Miller, the sale of “the parts business is likely a precursor to the sale of the entire company.” Here is everything that Miller said about the automaker in the letter.
Fiat Chrysler (FCA) – Fiat’s long-time CEO, Sergio Marchionne, passed away just this morning (as I write this) after becoming gravely ill due to complications from a shoulder surgery. I have studied Sergio Marchionne for the past five years. I have read books, articles, and interviews; I have parsed his words with fellow shareholders. There is no other way to say it: he was the best. He got it. He was a straight shooter; he played the long game; he addressed issues head on; he admitted mistakes; he consistently exceeded expectations. Sergio had been planning to depart Fiat at the end of this year, and the company had already shored up its leadership and planning. After the onset of his illness, Sergio was replaced by a tenured lieutenant who had run the Jeep and Ram division. From a financial perspective, I think our Fiat investment will continue to appreciate with the strategy and foundation put in place by Sergio and his team. From a personal perspective, I have lost a hero.
Here are a few facts. The Chairman and his holding company, Exor, own approximately 30% of the company. FCA is in a net cash position. In June, U.S. sales were up 8% year over year, including a 1% reduction of marginally profitable fleet sales and strong increases in higher margin jeeps and trucks. In Europe, sales are down by 2% in terms of units, but the mix shift away from low margin Fiats and Lancias to high margin Jeeps and Alpha Romeo should be accretive. All backward-looking data points are positive.
The company has indicated it will spin off or sell their auto parts business, Magnetti Morelli, this year. Management has been stingy with information so far, but the unit is likely worth north of $4 per share. I suspect that the parts business will ultimately be sold off rather than spun off, as FCA management has high return uses for the cash, such as building a captive finance company or executing a buyback. In fact, I believe that the sale of the parts business is likely a precursor to the sale of the entire company. John Elkann, who runs Exor, inherited Fiat from his grandfather. Unlike his industrialist grandfather, Elkann has shown a preference for asset light businesses like media and reinsurance, and premium brands such as Ferrari. We are several years into an economic cycle and the fruits are evident in FCA’s balance sheet and earnings power. There are synergies to be realized from combining with another manufacturer. Now is a logical exit window for Exor. The company will not be given away, but a reasonable offer would receive very serious consideration.
How might this play out? Looking ahead just a few months, there is a likely scenario where Fiat Chrysler will be sitting on $7+ of net cash from the sale of Magnetti Morelli and the ordinary cash generation of the business. According to the five-year plan, which seems to be conservative, the company (ex-Morelli) will generate on the order of $4 in earnings per share (EPS) in 2019. With the current price hovering around $17, this would be a healthy business with a strengthening balance sheet selling for 2.5X growing earnings (ex-cash). A lot of destruction from trade wars is baked into the current price. If and when these fears dissipate, there appears to be significant upside in FCA shares. If and when a sale is negotiated, given the potential for significant synergies – at least some of which should accrue to the sellers – there should be even more upside. An 8% price decline on the quarter is not fun, but we are not playing for 8% here.
Fiat Chrysler Automobiles (NYSE:FCAU) is a giant auto firm that is listed on the New York Stock Exchange (FCAU) and Borsa Italiana in Milan (FCA). It is the seventh largest automaker in the world. The company’s shares are down 4.95% since the beginning of the year. The share price has fallen 2.20% over the past three months. Whereas the stock price has moved up 3.70% over the past 12 months. FCAU has a consensus average rating of ‘OVERWEIGHT’ and a consensus average target price of $19.00 from analysts polled by FactSet. The stock was closed at $18.24 on Wednesday.
Meanwhile, Fiat Chrysler Automobiles (NYSE:FCAU) isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 29 funds in our database with positions in the automaker.