Special Situations: Fiat Chrysler Automobiles NV (BIT: FCA/NTSE: FCAU)
FCA was issued in the beginning of FY14 following the completion of the merger between Fiat and Chrysler, as the parent company of the group. In October shares commenced trading on the NYSE (NYSE: FCAU) and on the MTA (BIT: FCA).
Investments strategy & catalysts
We consider FCA as one of the most interesting short term and long term stories within the Auto manufactures universe, given a number of potential catalysts we identify and would recommend investors to follow: (1) Implementation of the 5 year business plan that was announced following the merger with Chrysler; (2) Ferrari IPO and spin-off in Q315; (3) further euro/US dollar weakness.
FY14-FY18 business plan – Following the merger with Chrysler, FCA management laid out a detailed 5 year Business Plan with clear strategic and financial targets that should deliver significant earnings growth over FY14-FY18. Management targets a 50% increase in volume units and a significant improvement in margins by FY18, mainly through brand globalization and cost synergies. These goals clearly look aggressive and the street is not expecting FCA to fully meet them, indicating that a better than expected implement will lead to a material upside to the stock.
Ferrari IPO - the expected IPO and spin-off of Ferrari will be in the spotlight of investors as it should unlock hidden value by moving the focus to the sum of FCA’s other brands and geographical segments. We assign to Ferrari a valuation of €7 billion which reflects 28% of total equity value, based on 2.5 EV/Sales multiple which we believe is appropriate given Ferrari’s margins and growth prospect vs. the luxury universe. However, Ferrari IPO could be a positive catalyst if investors are prepared to assign Ferrari a full luxury multiple value.
Euro/US dollar weakness – FCA generates more than half of its revenues and earnings in US Dollar while its functional currency is Euro. Further euro/US dollar weakness should have a positive impact on earnings and balance sheet, and on FCA stock.
Valuation
We value FCA at €16.5 per share using a sum of the parts analysis based on 2015E EV/Sales multiple through the company’s seven reportable segments. Our price target includes pension and OPEB obligations, and full conversion of convertible bonds resulting in approx. 10% upside from current levels. We see additional 10%-15% upside if we assign to Ferrari a higher valuation of €9-€10 billion.
Key risks
Main risks include: (1) unexpected drop in global vehicle demand; (2) poor execution of FCA business plan along with significant capex investments that would result in high debt balance; (3) product recalls and warranty obligations which may result in direct costs; (4) strengthening of the euro/US dollar exchange rate.
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Regards,
Dafna Yagur | Head of Research (Israel)
Makor Capital
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