Laughing Water Is Bullish on Fiat Chrysler Automobiles NV (FCAU)

Laughing Water Capital discussed Fiat Chrysler Automobiles NV (NYSE: FCAU) in its Q4 investor letter – along with other companies. You can download a copy of the letter here. In this article, we’re taking a look at the comments made by the fund’s managing partner Matthew Sweeney about Fiat Chrysler in the letter. Here are his comments:

Fiat Chrysler (FCAU) – Fiat is somewhat unique amongst our names in its cyclicality: if there is a recession, this business will suffer. However, given the strength of the company’s brands and the strategic options it has in front of it, at these prices in my view it is worth looking through any potential slowdown in business. Fiat has proven that they are willing and able to pull multiple levers to create value, most recently with the sale of their parts business, which will close shortly. They have also indicated that a potential sale of their robotics business may be in the works, and they will be establishing a financing business in the U.S., which is a much better business than selling cars. They are also entering new verticals with the Jeep Gladiator and 3 row SUVs, which should provide a measure of growth even if the macro environment softens. Additionally, I believe that at some point the entire industry will re-rate higher.

If there are two businesses, both of which are cyclical, but one of which loses money during a recession, while the other is able to break even, all else equal the one that breaks even deserves a higher multiple. This is easy to see when thinking about two businesses in the same time period, yet remains true if we are thinking about one business in two different time periods. Simply stated, auto OEMs are much better businesses now than they were prior to the financial crisis because they have shifted their business models and reshaped their liabilities in such a way that they should be able to break even in all but the most severe recessions, and as such, they deserve higher multiples than they used to.

Long range forecasts should of course be viewed skeptically, but FCAU believes they can earn somewhere around $7 to $8 per share in 2022, meaning that we are presently paying a future P/E of 2 for a company with very strong brands, multiple strategic levers available, an incentivized controlling shareholder, and the pending launch of a recession resilient financing business. We may need to weather a recessionary period to prove out my belief that the sector will rerate higher, but as success would lead to multiples of the current price, the odds are heavily skewed in our favor.

2019 Chrysler 300C

Fiat Chrysler Automobiles (NYSE: FCAU) is listed on the New York Stock Exchange (FCAU) and Borsa Italiana in Milan (FCA). Exor S.p.A, an Italian investment group controlled by the Agnelli family, has a 29.19% ownership in the world’s eight-largest automaker. The company’s portfolio includes automotive brands Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Maserati, and Ram Trucks.

On the share market, Fiat Chrysler’s performance doesn’t look very impressive. Shares have been in downward trend since April 2018. Year-to-date the stock is down 1.12% so far this year. The share price has dropped nearly 33% over the past 12 months. Closing at $14.17 on Thursday, the consensus average target price of the stock is $15.61, while the consensus average recommendation is ‘HOLD’, according to analysts polled by FactSet.

Meanwhile, FCAU isn’t a very popular stock among the hedge funds tracked by Insider Monkey. As of the end of the third quarter of 2018, there were 33 funds in our database holding shares of the automaker, including Mohnish Pabrai and Aquamarine Capital Management.