* Source of opportunity
The Ferrari IPO and spin-off is the latest step in FCA’s multi-year value
creation journey. Post the spin-off, the market’s focus is likely to turn to the
value of FCA core: on this basis, we see an asset trading at lower valuation vs.
Ford and GM, and with stronger earnings growth. FCA’s operational story has
geographic (NAFTA, EMEA) and product (Jeep, Alfa) angles, and drives EPS
growth from above and below the line. We forecast an EPS CAGR of 23% for
2015-19, the highest of any European OEM in our coverage. The structural
clean-up will continue with the suppliers, and the M&A angle is the icing on
the cake of our investment case; we reiterate our Conviction List-Buy.
* Catalyst
With the Ferrari spin-off behind us, catalysts include: ongoing operational
improvement and EPS growth; an ongoing structural clean-up, potentially
including the announcement of a spin-off or disposal of FCA’s components
businesses (including notably Magneti), in line with CEO Marchionne’s
stated aim; and potential M&A discussion.
* Valuation
Our new 12-month price targets for FCHA.MI/FCAU are €12.0/$13.0, based
on: (1) a ROIC methodology (85% weight) on a 2016E ROIC of 7.0%; and (2)
an M&A value (15% weight) derived from our sum of the parts valuation.
The change in our price targets (from €18.0/$19.6 previously) is
predominantly due to the stripping out of the value of FCA’s Ferrari stake
(spun out from January 3) plus the impact of minor estimate changes to
FCA’s financial charges and JV income (definitional changes trigger the
reduction in our published 2015 EPS estimate).
* Key risks
Key risks include: deterioration in the risk appetite of equity markets, end
market deterioration (especially NAFTA), USD weakening, further recalls in
the US, potential selling pressure post the Ferrari spin-off, and CEO
Marchionne ‘key man’ risk.