Fiat Chrysler Automobiles NV NYSE: FCAU

 

Price as of 10/06/15: $14.25 Target Price: $19.77

Investment Recommendation •  We recommend to buy FCAU at the current price •  FCAU satisfies the Orange Value Fund’s “safe

and cheap” investment strategy –  Safe

•  Well capitalized for an automobile manufacturer •  Consistent growth in EBITDA since 2010 •  Ferrari spinoff will provide additional capital to reduce debt

levels and increase profit margins – Cheap

•  FCAU is trading at a 43.4% discount to NAV •  The company has $24 billion in cash and only 1.288 B shares

outstanding ($19.06 of resource conversion value)

Investment Catalysts •  Ferrari spinoff will help reduce debt levels and increase profitability

of overall business •  New 2014-2018 business plan calls for expanding the rapidly

growing Jeep brand through localized production in Asia and Latin America

•  FCAU has been holding onto cash pursuing a merger with GM, a deal that would create a combined entity of over $30 billion in cash –  CEO Sergio Marchionne says the merger would also drastically

decrease prices from suppliers and R&D expenses •  European auto manufacturers have seen significant decrease in price

as a result of the VW scandal –  FCAU has been aggressively pushing to steal market share from VW

by offering significant rebates and discounts for any VW trade ins

Business Overview

•  Business Segments

*Mass  Market  Vehicle  Sales  Segmented  by  Geographic  Region  

Segment Information

Revenues Restated12 months

Dec-31-2012

Reclassified12 months

Dec-31-201312 months

Dec-31-2014NAFTA $57,381.50 $63,040.69 $63,489.68 LATAM $14,585.01 $13,734.08 $10,444.83 APAC $4,183.53 $6,428.42 $7,576.11 EMEA $23,359.48 $23,872.48 $21,812.02 Ferrari $2,933.61 $3,215.59 $3,343.22 Maserati $995.45 $2,284.65 $3,349.27 Components (Magneti Marelli, Teksid, Comau) $10,587.38 $11,127.18 $10,432.73 Other $1,290.79 $1,279.35 $1,005.87 Corporate ($4,874.40) ($5,690.30) ($5,143.10) Total Revenues $110,442.35 $119,292.16 $116,310.60

Strong unit sales growth in APAC region; FCAU’s most profitable mass market segment

Strong sales growth in Maserati segment; FCAU’s only luxury segment after completion of Ferrari spinoff

Capital Structure •  The company is trading at low

–  Net Debt/EBITDA multiple:1.03x (Industry Average: 4.9x)

–  Total Debt/EBITDA multiple: 3.2x (Industry Average: 5.7x)

Ferrari Spinoff •  On October 29th, 2014 the Board of Directors announced that it had authorized the separation

of Ferrari from FCAU. •  FCAU CEO Sergio Marchionne expects Ferrari NV to be valued at “at least” 10 billion euros. •  FCAU plans to sell 10% of Ferrari (1 billion euros) to the public and redistribute the

remaining 80% of FCAU’s ownership to FCAU shareholders. –  Allows FCAU to pay down debt, decrease interest expenses and increase profit margins. –  If FCAU were to use all of the proceeds from the spinoff to pay down LTD, their Net

Debt/EBITDA would drop from 1.03x to 0.91x. –  The terms of the spin off incentivize major share holders to hold onto the new company.

•  loyalty voting program; every shareholder who holds onto their share of Ferrari for at least 3 years will effectively receive two votes for each common share of Ferrari that they own.

Fiat-Chrysler Merger Timeline  •  April  2009:  Chrysler  files  for  Chapter  11  Bankruptcy    •  June  2009:  Chrysler  emerges  from  bankruptcy  with  the  United  Auto  Workers  (UAW)  pension  fund,  Fiat,  

the  United  States  government  and  Canadian  government  as  its  principal  owners  •  2011:  Fiat  acquires  close  to  60%  ownership  from  the  other  parQes  •  January  2014:  Fiat  completed  the  acquisiQon  of  the  remaining  41.5%  from  the  UAW  making  Chrysler  a  

wholly  owned  subsidiary  

 

In  fiscal  2011  Fiat’s  cash  balance  increased  from  $16,518  (mm)  to  $23,793  (mm)  and  LTD  increased  from  $13,904  (mm)  to  $35,197  (mm).  A  majority  of  both  of  these  spikes  can  be  a_ributed  to  the  merger  with  Chrysler.    

 

Valuation Comps •  FCAU is trading at a discount on

–  EV/Revenue –  EC/ECBITDA –  EV/EBIT

Company Name TEV/Total Revenues LTM - Latest

TEV/EBITDA LTM - Latest TEV/EBIT LTM - Latest P/Diluted EPS Before Extra LTM - Latest

Ford Motor Co. (NYSE:F) 1.1x 11.8x 26.7x 14.8xDaimler AG (XTRA:DAI) 1.2x 10.9x 14.6x 9.8xVolkswagen AG (XTRA:VOW3) 0.8x 6.3x 9.8x 7.6xRenault Société Anonym (ENXTPA:RNO) 1.1x 9.3x 13.8x 8.0xPeugeot S.A. (ENXTPA:UG) 0.3x 3.4x 6.5x NMGeneral Motors Company (NYSE:GM) 0.5x 5.3x 8.8x 11.1x

Fiat Chrysler Automobiles N.V. (BIT:FCA) 0.3x 3.2x 6.1x 18.1x

Summary Statistics TEV/Total Revenues LTM - Latest

TEV/EBITDA LTM - Latest TEV/EBIT LTM - Latest P/Diluted EPS Before Extra LTM - Latest

High 1.2x 11.8x 26.7x 14.8xLow 0.3x 3.4x 6.5x 7.6xMean 0.8x 7.8x 13.4x 10.3xMedian 0.9x 7.8x 11.8x 9.8x

FCAU is trading at a high P/E because earnings are skewed by high interest expenses

Debt Schedule

Year Debt2016 $5,542.582017 $4,178.652018 $3,776.572019 $4,310.562020 $3,789.142021 $8,675.222022 $958.232023 $3,000.00

Total $34,230.95

FCAU has relatively stable debt maturities until 2021

FCAU Ownership

Investment Risks •  Low demand on vehicle sales, particularly minivans, larger utility vehicle

and pick-up trucks could cause the business to suffer. Since auto manufacturers have such high fixed costs, a 10% decrease in vehicle shipments would lead to a 40% decrease in EBIT.

•  Credit rating is below investment grade any further deterioration may significantly affect access to capital markets.

•  If FCAU cannot increase profit margins, it will be tough raise capital and compete with competitors.