Laughing Water Capital recently published its Q2 investor letter – you can download a copy here. In the letter, the hedge funds discussed its investment thesis on Fiat Chrysler Automobiles NV (NYSE: FCAU). Laughing Water Capital is bullish on the automaker and the fund’s founder and managing partner Matthew Sweeney believes that the company’s five-year plan will “drive intrinsic value for years to come.” Let’s take a look at Sweeney’s comments about FCAU”.
Similar to EZPW, we have owned FCAU since inception, and it remains a top 5 position. Management has been executing at a very high level, and recently released a 5 year plan that should continue to drive intrinsic value for years to come. Perhaps most notably, the company plans to launch a financial arm in the U.S. that I believe could be worth ~40% of current enterprise value and ~60% of current adjusted enterprise value within a few years. However, at the moment the market is more focused on the possibility of tariffs, and there seems to be some disappointment that management was not more aggressive with their 5 year plan.
There isn’t much to be said about tariffs except that ultimately, I think these concerns will just be noise. In terms of the 5 year plan, I much prefer management teams that under promise and over deliver, and Fiat has a track record of doing exactly that. What is more important in my view is that successfully completing the 5 year plan is not necessary for investment success; the stock is very cheap today, and there are identifiable events on the horizon that will illustrate this value. First, the company has announced they will be spinning off their parts division into a stand-alone company. Second, if the company hits their year end guidance, which is all but guaranteed at this point, the balance sheet will be in a net cash position. Adjusting the enterprise value for these two factors reveals that core FCAU is trading close to 1.6x EBIT.
Bears will of course note that this is a cyclical stock, and 1.6x EBIT may not appear cheap if the economy goes off a cliff. There is some validity to this view, but in my view current valuation is fully pricing in a recession in the near term that might not develop for years. Further, from a high level, I believe that bears are still applying historical multiple ranges to the auto makers, despite the fact that following the structural and operating changes that were made in the wake of the great recession these are much better businesses that will be much more resilient during downturns than they had been historically.
In any case, FCAU is not a stock that we will hold forever, but with a cleaned up balance sheet and very low valuation set to be revealed to the masses (and the mechanical screeners that dominate markets) in the near future, I think we will be well rewarded for ignoring the potential cyclicality in the near and intermediate term. Longer term, progress on the 5 year plan will have to be monitored for signs of success or difficulty, but if their previous 5 year plan is any indication, the next 5 year plan includes a large margin of safety, and should be attainable.
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). Exor S.p.A, an Italian investment group controlled by the Agnelli family, has a 29.19% ownership in the world’s seventh-largest automaker.
Fiat Chrysler shares are down 12.70% so far this year. The stock has dropped 28.65% over the three months. However, over the past 12 months, the share price surged 27.70%. The consensus average target price of the stock – currently trading at around $16.20 – is $19.68, while the consensus average recommendation is ‘Overweight’, according to analysts polled by FactSet.
Meanwhile, FCAU isn’t a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the fourth quarter of 2017, there were 36 funds in our database holding shares of the automaker, including Mohnish Pabrai, Aquamarine Capital Management, and SRS Investment Management.