Next Level Analysis
Fiat Chrysler (FCAU)
Why I became interested in FCAU
This company first showed up on a screener I often look at for Investing ideas, it’s called The Acquirer's Multiple. Based on this metric, It was (and still is) one of the cheapest large cap stocks on the market today, with an Acquirer’s Multiple of 4.33, making it the second cheapest stock on this Large cap, Value Investing screener.
Other metrics I like to look at:
I often use an investing method called ‘Coat Tailing’ to find amazing investment ideas. Because of this method, I noticed that Mohnish Pabrai, (my favorite NLI) had a substantial amount of his portfolio in FCAU. After further research, I found he bought in at around $7. After this, I started to dig into the business myself, and finally pulled the trigger at a price of $10.05.
Top 3 NLI Ownership?
Here are some great value investing Guru’s who currently own FCAU:
| Next Level Investor | Price They Paid | Portfolio Percentage |
1 | Mohnish Pabrai | $7.55 | 75.50% |
2 | Guy Spier | $7.28 | 21.15% |
3 | David Poppe | $11.37 | 4.70% |
I’m looking for Next Level Investors that I trust and follow to show up on this list. I know that Both Mohnish Pabrai, and Guy Spier are amazing Next Level Investors. This helps to add substantial validity to any investment idea I have. It’s not necessarily a deal breaker if no Gurus are buying the business I’m looking at, especially if it’s a Small Cap business, but it does make me think more carefully before I make a final buying decision.
Getting to Know the Business
This is where I dig into the financials, check out the competitors, and vet the leadership.
What Industry is the Business in?
FCAU is in the Automotive Industry and competes with the likes of Ford, GM, and Toyota.
FCAU owns many great vehicle brands including:
Jeep
Dodge
Maserati
Alfa Romeo
Here are FCAU top competitors in the industry based on market cap.
Company name | Market Cap (in Billions) | ROIC | Trailing PE | Forward PE | Rank |
FCAU | $39.17 | 10.45% | 6.15 | 4.42 | 1 |
Vs #1 Toyota (TM) | $191 | 8.73% | 8.18 | 8.80 | 2 |
Vs #2 Ford Motor (F) | $44 | 3.97% | 5.89 | 6.94 | 3 |
Vs #3 Tesla (TSLA) | $52.45 | -15.17% | N/A | N/A | 4 |
Why ROIC?
Return on Invested Capital is an excellent metric for us to look at any time we’re looking to make an investment. It gives us an idea of just how capable the current management team is at allocating excess capital, and therefore, growing the business for us. Ideally, we want to see this number above 10% and closer to 15%. You can see that only FCAU meets our minimum requirement with an ROIC of 10.45%.
PE Side note: Another excellent metric to look at is the difference between the TTM PE (Trailing Twelve Month Price to Earnings Ratio) and the Forward PE. This number is based on the analysts growth rate for the business. Therefore, If the Forward PE is lower than the TTM PE, that’s a good sign. In this case, we have a forward PE of 4.42. Another way to look at this is if we owned the entire business, it would take 4.42 years of the company's earnings to pay off our entire investment. That’s a very low number. Just for comparison, the ‘Market’ average is 22.6 right now.
Will This Business be stronger or weaker in the Next 10 Years?
I believe that this industry and company will continue to grow well into the future. Their margins continue to grow in almost all regions they compete in. They are expecting large growth in both Latin America and in China into the future. FCAU’s main focus has been on the reduction of costs, and the intelligent use of R&D (research and development). If they can manage to stay on track for their 2018-2022 plans, they will save an additional $11.6 Billion over that period due to manufacturing and purchasing efficiencies.
They have also been shopping around their components business Magneti Marelli. They said that they would consider a sale to the right business, if the offer was High enough. This could add anywhere from $5-8 Billion in shareholder value (currently a third of the Market cap of $24B). Though I’m not sure if they will pay this out as a one time dividend, or if they will use it as cash reserves for the business.
It’s important to understand that when the economy goes into turmoil or if we go into another recession, then FCAU will be hit hard, likely depressing the stock price, their margins, earnings power, and decreasing the likelihood that they will stay on track to accomplish their 2022 goals. This is why I must only purchase this company with a large Margin of Safety, to protect my ass(ets) if the economy takes a turn for the worse.
Can I understand this industry? This industry is fairly easy for me to understand. They essentially develop and sell a wide range of vehicles to the public. They have to continue to develop new vehicles and R&D to stay with the vehicle trends that we live in. It is a very capital intensive business, making it very difficult for new competitors to come into the industry and make money. I believe with the future growth of the world population, and FCAU’s continued commitment to smart spending, growing margins, and factory consolidation; FCAU will be in a good position for success. All of these factors should lead to an overall increase to the businesses cash generation, as well as earnings output.
Why do I like this company?
I think this company provides a valuable resource for its customers. They also own some amazing brands like JEEP, Maserati, & Alfa Romeo. They also had the legendary leadership of Sergio Marchionne (who sadly passed away recently). Update: Mike Manley is the new CEO for FCAU and has worked alongside Sergio for the past 9 years.
This company had exceptional leadership with Sergio. They had a 4 year plan ending in 2018 to eliminate Debt and increase EPS substantially over that period. This gave me a buying opportunity of a forward PE of around 2.5 at my $10 price point. The company has again set out their 4 year plan, and with today's stock price, if they reach the low end of their target, I can buy at a forward PE of 2.88. In other words, this is potentially a Low-Risk, High-Reward candidate.
Side note: FCAU believes they will have EPS of around 6.9 - 8.5 by 2022. Comparing this PE with the current market average of 24.61 shows a significant investment advantage over most other companies today. FCAU in contrast, is currently selling for a PE of 6.
Durable Competitive Advantage
What makes this company difficult to compete with, and not only that, but also durable? (What protects it from competition?).
We all know that starting a car company is an extremely expensive and difficult venture. Just look at Tesla. They have arguably some of the nicest cars for sale on the planet, and legendary leadership in Elon Musk, and yet they still can’t seem to make any money. This is a major competitive advantage FCAU and the other current car companies enjoy.
The other main advantage they have over their competitor is a brand moat. The own three iconic brands in Jeep, Maserati and Alfa Romeo, giving them a good sales advantage over the competition.
FCAU is currently pivoting it’s focus toward more Jeep centric sales. They are doing this because the Jeep brand garners some of the highest margins, sales numbers, and arguably the largest brand moat that FCAU holds.
I believe that these moats are durable because of the barrier to entry the business offers, and the brands that FCAU owns are iconic and ingrained in the American psyche. This is especially true with the Jeep Brand.
They also have been paying out some special one-time Dividends.
Growth Rate Numbers
Do they help confirm the Moat?
Description Growth Rate | Average GR % last 10 years |
BVPS + Dividend | 14.92% |
EPS | 58.44% |
OCPS | 7.56% |
Sales | 8.66% |
My Estimated Future Growth Rate: 10%
Analysts current expectations for growth: 20.11% (next 5 years)
Companies own EPS estimate for next 4 years: 24%
Valuation
Rule#1 Margin of Safety (MOS) Analysis: | |
EPS TTM (Earning per share/Trailing Twelve Months): | $2.98 |
Future Growth Rate (from Calculator) or your own Estimated FGR: | 10.00% |
Future EPS in ten years: | $7.73 |
Estimated Future P/E Ratio in five to ten years | 15 |
Future Value in ten years | $116 |
Minimum Acceptable Rate of Return (MARR) per year: | 15% |
Sticker Price: | $28.66 |
Margin of Safety Price: | $14.33 |
#2 Payback Time Analysis (PBT): | |
FCF (Free Cash Flow) Per Share: | $1.56 |
FCF Ratio % | 52.23% |
Current Price FCF Payback Time | 8 Yrs. |
FCF Eight Year Payback Time Price: | $19.62 |
#3 Ten-Cap Rate Analysis: | |
CASH FLOW STATEMENT: | $ |
Net Income: | 4,190 |
Plus Depreciation and Amortization: | 7,070 |
Plus/Minus Accounts Receivable | -247.3 |
Plus/Minus Accounts Payable | 1,303 |
Minus Maintenance Capital Expenditures | 6,086 |
INCOME STATEMENT: |
|
Plus Income Tax Expense | 1,186 |
Total = Owner Earnings | 7,415.70 |
STOCK AT A GLANCE: |
|
Divide by Shares | 1,958.59 |
Owner Earnings Per Share | $3.786248 |
TEN CAP VALUATION PRICE (OE x 10): | $37.86 |
#4 GuruFocus FCF Analysis | |
TTM EPS: | $2.92 |
Growth rate for the next 10 years: | 10% |
Terminal Growth Rate: | 1% |
Years of Terminal Growth Rate: | 10 Yrs |
Discount Rate: | 15% |
Fair Value: | $31.13 |
Margin Of Safety Price: | $15.57 |
Current Margin Of Safety % | 38% |
Reverse Engineered DCF Growth Rate | 2.48% |
(Numbers found on RuleOneToolbox.com and Gurufocus.com)
Is FCAU on sale?
Answer: It is, However, it’s not yet at my MOS price of $14.33 (most conservative estimate).
Even though it is currently below it’s fair value price of $28.66, giving us a 39.6% MOS. Still, it is not deeply discounted enough to attain a reasonable Margin of Safety (50%).
Remember, we don’t buy anything that’s above our MOS price, especially if we are just starting out. We have to be disciplined, and it will quite literally pay to be patient here. The market will always give us the opportunity to buy at a low price, we just have to remain patient, ready with our cash in hand, and take action when the company reaches our margin of safety. Sounds simple enough right?
Biggest Risk Factor
The Single biggest risk with FCAU is North America. What I mean by this is FCAU relies heavily on the Ram and Jeep sales that come out of this region. The sales here makeup the largest portion of earnings in the company. Therefore, the biggest risk to FCAU is the possibility of an Economic downturn/recession in the US.
To Combat this possibility, FCAU would need to see a large amount of growth in Europe, Asia, and Latin America. The thing is, if there is a recession in the US, this usually means the recession is global, so this may not be the best fix.
Buying at My MOS price today
The fun part for me, as an aspiring NLI, is I usually don’t have to wait for the company I want to own to go all the way down to my MOS price. In fact, I'm able to weazel my way into my MOS price without the market having to cooperate all that much. This is where the ‘Next Level’ claim of my website really comes into play. It’s what sets this style of value investing apart from the Vast majority of all other value investors out there. In other words,
This is the fun part…
We’ll look at how I can do this in my next post. Stay tuned.
~Ryan Chudyk~
Disclaimer: This is for entertainment and educational purposes only. This is not to be taken as investment advice. I am not an investment advisor, nor have I considered your personal situation as your fiduciary. In other words, any investment you make (or don't make) is completely your responsibility.
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