Exor SpA (EXO IM): The Italians Are Coming

Imagine you could concentrate your 401(k) in two deeply under-valued companies that have best-in-class growth prospects in their respective industries (which are both undergoing a secular bullish trend) and a board and management team that are both best-in-class, if not serious contenders for an appendix to William Thorndike’s The Outsiders. Now, imagine that your company allows you to contribute to your 401(k) with a generous matching provision. Every dollar your contribute to your account gets magnified by up to 77%. Instant 77% returns on investments that have potential to at minimum double over the next year. Would you put every excess dollar you had into that 401(k)? We would too.

Such an investment opportunity exists in shares of Exor SpA (EXO IM), which is a publicly traded holding company controlled by the Italian Agnelli dynasty. Exor owns controlling positions in both Fiat SpA and Fiat Industrial SpA (soon to be renamed CNH Industrial), which are both materially undervalued relative to peers, have industry-leading growth trajectories, and are rich in catalysts to unlock value over the next six months. Exor owns some other more minor investments, which we will discuss later, but its recent investing activities have been focused on buying back its own shares at 33-44% discounts to its net asset value. Repurchases of stock at such levels immediately has a return on invested capital of 47.6%-77.3% at the minimum and maximum discount levels this year. To show the firepower a buyback has on EXO’s NAV per share, if it were to deploy all of its current €6.66 per share of net cash on repurchases (it could actually go further since it can run leverage) at today’s share price, the €6.66 would create an incremental €5.38 per share in NAV per share. We only question why Exor isn’t being more aggressive in its repurchases.

Our favorite investment of Exor’s is Fiat SpA (F IM), which has significant cost-saving opportunities with Chrysler, is launching a robust collection of new products into the market now through 2015 (many vehicles are in segments where Fiat currently has no presence in major markets), and is preparing to fully acquire Chrysler’s minority interest for a bargain, thanks to a contract signed during the financial crisis. Once the merger happens, we think Fiat is at least a double, with much more room to run as new products are launched and cost savings are fully realized. We quantify this opportunity in the section on Fiat.