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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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


Pricing as % of Sales -0.8% 0.6% 4.4% 4.3% 0.5%


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%


Pricing as % of Sales 1.4% -1.7% -2.3% -2.6% 0.9%


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


Pricing as % of Sales -1.1% -1.0% -0.5% 0.5% -0.4%


NA

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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

http://www.gwinvestors.com/wp-content/uploads/FCA-RACE-EXO-What-if-the-Market-is-Right.pdf

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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


TEV/EBIT 10.4x 11.9x 13.4x

TEV 1,838 2,540 4,000


Per share 1.19 1.65 2.60

Components Bear Base Bull

2018 Net Revenue 9,845 10,099 10,298




TEV 3,012 3,454 3,913


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



TEV 13,937 26,070 31,560


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



TEV/EBIT 10.4x 11.9x 13.4x

TEV 2,338 3,033 4,240


Per share 1.52 1.97 2.76

Components Bear Base Bull

2019 Net Revenue 9,845 10,301 10,607




TEV 2,774 3,542 3,713


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%

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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

Documents

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