* Two “super-CEOs” on a final global mission and Europe is also looking better
Carlos Ghosn and Sergio Marchionne are entering their last stretch as global CEOs with
new ambitious targets and c.3 years left to potentially complete the transformation of
their groups into scaled up global OEMs. With Europe starting to recover faster than we
expected from historic lows, both CEOs could well retire on a high. Both stocks offer
meaningful upside from operations and a history of valuation “inefficiencies” which
could be fixed at Renault and will be fixed at Fiat Chrysler Automobiles (FCA).
* Operations: Renault reassuring and inexpensive and low expectations for FCA
Renault’s strong balance sheet, high cost visibility (French restructuring, Alliance
synergies) are only modestly priced in, and even top line looks promising as Renault
brand stops shrinking in Europe. Despite a solid share price run ytd, we think
expectations are still low that FCA can revive Alfa Romeo or bring Brazil margins
anywhere close to historic levels.
* Corporate: High Nissan leverage for Renault and portfolio upside at FCA
There is no clear valuation anomaly left at Renault (stub now positive and Nissan derated
to European multiples) but fairly high leverage to Nissan shares and lowly valued
core maintain high upside for shares. Expectations of change in the Alliance have
disappeared. By contrast, expectations of portfolio change are higher at FCA, and
rightly so given management’s track-record. Fixing the balance sheet may require help
but the potential upside from further group break-up is high with an independent
Ferrari estimated to be worth more than €4 per share and Components (Magneti-
Marelli) potentially worth €2.5 per share.
* Valuation: Upgrade Renault (€85 PT) and Fiat (€10 PT) to Buy
Recent volume data points in Europe are more supportive than expected. Both OEMs
are set to secure their position at the top of Tier 2 global OEMs in our view. Size itself is
not an asset as we saw in the past with Toyota or GM. Most preferred global OEM
remains Ford (Buy, $18 PT) where scale achieved through platform and brand
consolidation exceeds size and least is VW (Sell, €180 PT) where scale is not necessarily
matching size given product range complexity and M&A capital spent on
diversification.