Fiat SpA (F IM) Update: Preparing to Strike

Updated Thoughts (last 8 months):

• 5-Year plan is both ambitious but achievable. Bears, who had discounted contributions from the new product cycle prior to the presentation, continue to disbelieve the lofty goals Fiat has set. As Sergio remarked to us after the meeting, he is tying bonuses to the plan, so if they don’t deliver, managers don’t get paid.
• Alfa Romeo will launch about 9 months later than we anticipated, pushing back + effect
• Marchionne committed to spinning off Ferrari once FCA strong enough to stand alone, current fair value ~€4.57 per share
• Near-term & long-term plan quite conservative, giving FCA a long runway to exceed currently negative expectations. Bears lament the back-end loaded nature of the plan, but we argue the stock reflects a 0% probability of ’17-’18 projections becoming reality. But what if…
• Maserati exceeding very ambitious plans, as a stand-alone brand, worth ~€7.31 per share once SUV launches (see page 13)
• Recent media reports that the Chrysler merger is in jeopardy are completely false and simply delay a NYSE listing – which may be immaterial
• North America poised to transition from an anchor to a workhorse in the coming quarters

Bear’s Arguments & Our Responses

• Leverage is unsustainably high. Leverage ratios have already peaked with bond yields below 4% for Fiat. De-leveraging likely to be far quicker than management’s stated objectives, thanks to increasing production & working capital
• Fiat is over-valued relative to peers on a GAAP Basis (it currently reports in IFRS). On estimated 2014 figures, the GAAP-equivalent valuation relative to deeply-undervalued GM is actually an average of €9.28 based on EBITDA. Using Ford’s valuation, it’s €18.43 (Page 17)
• Marchionne has missed aggressive targets in the past and is likely to continue doing so going forward. Aside from the unforeseen European crisis affecting past targets, the only major “miss” for Marchionne has been the delays in bringing back Alfa Romeo. Such delays have maximized Alfa’s ROIC (see Page 17)
• The 5-year plan relies on stable macroeconomic conditions which is unlikely (particularly LatAm & US). Our forecasts assume a soft LatAm economy through the period, while the US has years of pent-up demand

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